New Form 1099-NEC Marks Renewed Interest in Worker Classification

New Form 1099-NEC Marks Renewed Interest in Worker Classification

Going over tax documents.

The terms “gig economy” and “gig workers” are recent incarnations of long-established business practices involving independent contractors. Businesses often turn to independent contractors to perform specialized tasks, or to give themselves or their workers variable capacity. But the use of independent contractors by businesses such as Uber, Lyft, and Doordash as the bulk of their labor force has brought greater attention to the independent contractor role. This attention has manifested itself in several different ways.

Form 1099-MISC Changes and Form 1099-NEC

Beginning with the 2020 tax year, the IRS requires a new 1099 reporting form for nonemployee compensation. Previously, a taxpayer who paid nonemployees compensation of $600 or more would issue a Form 1099-MISC with the amount paid to the worker in Box 7. These payments are now reported in Box 1 of the new Form 1099-NEC. Also reported in Box 1 are cash payments made to someone engaged in the trade or business of fishing, and payments to attorneys for legal services rendered. To accommodate these changes, Form 1099-MISC was also modified. The following changes were made to Form 1099-MISC:

  • Payer made direct sales of $5,000 or more (checkbox) in box 7;
  • Crop insurance proceeds are reported in box 9;
  • Gross proceeds to an attorney are reported in box 10;*
  • Section 409A deferrals are reported in box 12;
  • Nonqualified deferred compensation income is reported in box 14;
  • Boxes 15, 16, and 17 report state taxes withheld, state identification number, and amount of income earned in the state, respectively.

* Gross proceeds to an attorney differ from payments to an attorney for legal services. Gross proceeds typically represent settlement proceeds paid directly to an attorney, from which the attorney deducts his or her fee; gross proceeds on Form 1099-MISC do not include attorney compensation for services rendered.

Employee Classification

In addition to the introduction of Form 1099-NEC, the increased use of independent contractors has brought increased scrutiny to the classification of workers as independent contractors. The IRS criteria for determining when a worker is an employee versus an independent contractor is organized into three broad categories. Each of these categories has several relevant factors that must be considered, and all businesses should be familiar with these categories:

  • Behavioral Control:  The extent to which the business has the right to direct and control the work performed by the worker, even if that right is not exercised;
  • Financial Control: The payment arrangement between the business and the worker, including the necessity for any out-of-pocket expenses or investments by the worker, and the ability for the worker to simultaneously make services available to the relevant market;
  • Relationship: The type of contractual relationship between the worker and business, including the provision of employee-type benefits, and whether the relationship is a key aspect of the overall business for the hiring company.

These broad categories seek to determine whether the arrangement grants the worker sufficient freedom over their actions, and whether the worker bears the risk of loss or the potential to profit from the arrangement. These categories are explored further in IRS Publication 15-A.

State Level Classification Rules

It is not just at the federal level that the independent contractor classification has come under scrutiny. Many states including New York and New Jersey have stepped up examinations for worker classifications recently. But perhaps no state has been more aggressive in pursuing employment misclassification than California. In pursuit of misclassified employees, California has placed special significance on the final item of the relationship test, “whether the work provided is a key aspect of the regular business of the company.” After litigation that rose to the California Supreme Court, the state passed Assembly Bill No. 5 (AB-5), a law applying a strict test that businesses must meet in order to claim workers are independent contractors. This test provides that a worker is an independent contractor only when:

  • The worker is free to perform services without the control or direction of the company;
  • The worker is performing work tasks that are outside the usual course of the company’s business activities (emphasis added); and
  • The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

For businesses such as Uber and Lyft, drivers are the backbone of their business, and the second prong of AB-5 is therefore problematic for those businesses.  All California businesses — from newspapers to software firms to trucking companies — must consider the impact of this new law.

Final Thoughts

If a business is able to properly classify workers as independent contractors, the new compliance measures that are associated with Form 1099-MISC and Form 1099-NEC come into play. This includes having a completed Form W-9 for each payee, to establish that the payee is not subject to backup withholding (or to designate any required backup withholding) For the 2020 tax year, both the payee and the IRS copies of Form 1099-NEC must be filed on or before Feb. 1, 2021. The 2020 Form 1099-MISC payee copies generally must be filed on or before Feb. 1, 2021, whereas the IRS copies of Form 1099-MISC must be filed on or before March 1, 2021 (paper filing) or March 31, 2021 (electronic filing).

For more information regarding the new Form 1099-NEC and the changes to Form 1099-MISC please contact your local CBIZ tax professional.

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New Form 1099-NEC Marks Renewed Interest in Worker Classification~/Portals/0/PackFlashItemImages/WebReady/Tax-Basis-Reporting-Notice-CBIZ.jpg new 1099 brings questions about worker classification....2020-09-22T20:18:25-05:00

The new 1099 brings questions about worker classification.

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