As real estate investors, we’re all very familiar with the 1099-MISC form. In fact, more than 70% of filers in 2019 used Form 1099-MISC, and we have been using it for years to file non-employee compensation as well as other types of payments made to non-employees.
Once there was a single form. Now, for tax year 2020, there are two: Form 1099-MISC and Form 1099-NEC.
Why the change?
While some of these details might be familiar, let’s break them down so we all better understand the need for the change from one form to two forms.
One reason for the change is due to the multiple uses of the old 1099-MISC form: self-employment or independent contractor income, award money, money from proceeds, rent payment, attorney payment reporting, and/or prize money, as well as others. All of these uses made Form 1099-MISC a somewhat complicated form.
Another reason was conflicting due dates for the same Form 1099-MISC depending on whether or not Box 7 was checked, which caused confusion and often missed filing deadlines (and resulting penalties), especially with the multitude of uses for the form.
- If Box 7, the box for non-employee compensation, was checked, the filing deadline was January 31 of each year for the previous tax year.
- If Box 7 was not checked, the filing deadline was February 28 (if filing on paper) and March 31 (if filing electronically) of each year for the previous tax year.
- If a filer sent in a batch of 1099-MISC forms after January 31 with Box 7 checked, the IRS would automatically send out late filing notices for all forms 1099-MISC submitted, causing the filer to have to contact the IRS to let them know which forms in that batch were/were not filed late. And the penalties per form for late submissions can add up very quickly. That’s a headache and an expense no one wants to deal with.
By creating Form 1099-NEC, the IRS is hoping to streamline the process for reporting income for all non-employee compensated workers—both self-employed and independent contractors.
Unfortunately, for us in the real estate investment business, many of us have hundreds (or more) 1099s to fill out, and the processes that were in place to take some of that burden off will now be a bit useless. Because of box changes on the 1099-MISC and the creation of 1099-NEC, any auto-populating that you previously could use will now need to be updated.
Before we get into the 1099-MISC vs. 1099-NEC change information, please keep in mind that we are not tax accountants. Be sure to discuss these changes with your tax professional to ensure you’re preparing and filing the correct forms.
What you were doing previously
In years past, you’d check Box 7 (“Non-employee compensation”) on the 1099-MISC form to report income for all non-employees, and all 1099-MISC forms had to be filed by January 31 of the following tax year. For 2021, since January 31 falls on a Sunday, the deadline is February 1, 2021.
Because non-employee compensation was previously a box within the 1099-MISC form, the system was set up for you to simplify the many 1099s you were likely preparing. However, since there were enough layout changes in the new 1099-MISC form, a new form and processes for completing forms 1099-MISC are needed even if you do not have any 1099-NECs to file.
What to do now
For tax year 2020 and the foreseeable future, the Box 7 referenced above was removed from Form 1099-MISC and is now on the new Form 1099-NEC, and you now have two boxes to complete on the new Form 1099-NEC:
- Box 1 is for non-employee compensation.
- Box 4 is for any monies withheld for federal withholding for that contract employee being reported in Box 1.
- Please note that the IRS has also eliminated the automatic 30-day extension for filing this form, although there may be some leniency this year due to those impacted by COVID-19 and other natural disasters in 2020.
The new Form 1099-NEC must also be filed by January 31 of the following tax year, but since January 31 falls on a Sunday in 2021, the official due date is February 1, 2021.
- It is important to note that a Form 1099-NEC that is filed electronically will not be forwarded to states for state filing purposes and will not be included in the IRS 1099 Combined Federal/State Filing Program. So, to avoid penalties, make sure that your electronically filed Forms 1099-NEC are also sent to the appropriate states.
How these changes affect Yardi and MRI Software
- Make sure you’ve got the patch before you start processing. If you’re using Voyager 7S SaaS or Saas Select, the plugin should already be installed. If you are on SOX or Private Cloud, you may have to open a ticket to request the plugin from Yardi.
- Make sure you’ve got the newest version of both forms.
- Procedure guides are available in Client Central
- MRI usually issues a patch release, but this year, MRI is only updating two upgrade tracks of their software, so if you want to process your 1099s on MRI and don’t have the latest version, you’ll be forced into a rather significant upgrade than what you were prepared for, which will include testing across a few areas.
- Your system needs to be on version 10.5.7.4 or 10.4.3.17 in order to get the patch, and you’ll need to upgrade your whole system first before you will be able to easily process your 1099s.
Some other things to keep in mind:
- If you’re used to ordering 1099-MISC forms, you may need to pay attention to what you need as far as 1099-MISC and 1099-NEC since you will probably need some of both forms. And because both forms have changed, you cannot use 2019’s leftover 1099-MISC forms.
Changes in processes can feel daunting and time-consuming, and we’re here to help you navigate these new IRS form changes. Contact us today.