...a CPA's random thoughts...
You are used to the 1099-MISC. What is this “new” 1099-NEC?
If you have looked at 1099 forms for January 2021 reporting of 2020 activity, you likely noticed changes to Form 1099-MISC, AND a “new” Form 1099-NEC. I say “new” because 1099-NEC was actually last used in the 80s, but is being put back into use.
Simply put, Form 1099-NEC reports Non-Employee Compensation (hence “NEC”). Accordingly, it is Form 1099-NEC that will be used for 2020 and beyond (until, of course, additional changes are made) for amounts historically reported in Box 7 of Form 1099-MISC. Those payments now to be reported on Form 1099-NEC include fees paid to attorneys for general legal services, even if they operate as a corporation, and general payments made to any non-corporate entity independent contractor or freelancer. For both Forms, the reporting threshold is $600 or more.
Form 1099-MISC still exists and will continue to be used for reporting amounts paid as rents, royalties, other income, fishing boat proceeds, gross proceeds paid to an attorney*, etc.
*Payments to Attorneys
One specific thing I want to go into more detail on is that these two different 1099s may need to be used for reporting payments to attorneys based on the NATURE of the payment. If you only paid an attorney for general legal services billed in a traditional manner and not in connection with an attorney receiving funds on a claimant’s behalf in a settlement, you need to utilize form 1099-NEC (just as in the past when this was reported as non-employee compensation in Box 7 of Form 1099-MISC). A lot of payors make the mistake of reporting ALL payments to attorneys in Box 10 of Form 1099-MISC, which is often incorrect. Box 10 is reserved for for the following:
- Payments made to an attorney as part of a settlement agreement paid to the attorney on behalf of the claimant, but NOT for their services as a legal professional, AND
- Total $600 or more, AND
- Are not reportable in Box 1 of Form 1099-NEC
In other words, if your lawyer settles a legal dispute and the lawyer receives $10,000 on behalf of the claimant, that $10,000 is reported in Box 10 of Form 1099-MISC. The claimant will then most likely receive a Form 1099-MISC with the amount reported in Box 3, Other Income, as well as potentially amounts in Box 4, Federal Income Tax Withheld, and Box 10, State Income Tax Withheld.
A general rule of thumb is if you have paid an attorney $600 or more, regardless of corporate status, for ordinary services, that amount is reportable on 1099-NEC. Only amounts paid directly to the attorney on behalf of a claimant in a settlement are reported in Box 10 of Form 1099-MISC.
FINALLY, the deadline for sending Forms 1099 to recipients as well as to the IRS is January 31, 2021. You are no longer allowed until the end of February to furnish Forms 1099 and 1096 to the IRS.
Sincerely,
Greg Bennett, CPA