As the end of the year approaches, many accounts payable departments are gearing up to complete their annual Form 1099 filings. For 2020, a new form, Form 1099-NEC, will be used to report payments of non-employee compensation to vendors. (See earlier coverage.) The IRS resurrected the Form 1099-NEC, which had not been used in decades, to replace Box 7 reporting on Form 1099-MISC because the Protecting Americans from Tax Hikes (PATH) Act accelerated the filing deadline for non-employee compensation to January 31. The rules for reporting on Form 1099-NEC are generally the same as for reporting in Box 7 of Form 1099-MISC in the past. However, the reporting requirements for the two may differ at the state level.
Many companies may not be fully aware of existing state filing requirements applicable to Form 1099-MISC, instead relying on the IRS’s Combined Federal/State Filing (CF/SF) Program to satisfy their state filing obligations. However, a number of states do not participate in the CF/SF Program. Many of those states require companies to file copies of Form 1099 (or similar state forms) directly with the state. Indeed, a number of states that do participate in the CF/SF program still require direct filing with the state. (Many companies also may not realize that they have an obligation to undertake source-based reporting at the state level and identify the state(s) in which services were performed by the vendor and report the amounts paid for such services in the state boxes of Form 1099.)
With the adoption of Form 1099-NEC, a number of states have announced direct filing requirements. This is a result of a delay in the inclusion of Form 1099-NEC in the CF/SF Program. States that relied on the CF/SF Program for income information in the past no longer will receive information from the IRS regarding payments of non-employee compensation. (The IRS plans to include the Form 1099-NEC in the CF/SF Program starting with returns filed for 2022.) Companies should take immediate steps to determine in which states they may be obligated to file Forms 1099-NEC and whether they are required to register with the state to file the returns.