Form 1099: Shaping the tax reporting landscape for more than a century

For more than 100 years, the evolution of Form 1099 has required organizations to repeatedly adjust their tax reporting and compliance strategies in order to allow the Internal Revenue Service to cross-check reported payments with an individual and entity’s tax return. In 1918, five years after the 16th amendment gave Congress the “power to lay and collect taxes on incomes,” businesses were required for the first time to use Form 1099 to report any payments that totaled at least $800 during the year. At the time, one version of the form covered all payments, such as salaries, wages, profits, etc.

After more than a century of policy changes and assertive efforts to close the tax gap, there are almost two dozen versions of Form 1099, each meant to clarify and easily delineate income from different sources, including interest, dividends, retirement and nonemployee compensation. Of course, not every version of Form 1099 is relevant to all organizations, but it’s not always easy to know the difference.

Over the decades, the various changes to filing rules and regulations have led to uncertainty for businesses of all sizes. In order to avoid costly reporting errors that can potentially result in a range of penalties and fines, businesses of all sizes need to reevaluate their compliance strategies.

Here are the three versions of Form 1099 that have and continue to shape the tax-reporting landscape:

Form 1099-K

In response to rising tax noncompliance rates, the IRS began pushing for more third-party information reporting in the early 2000s. In 2011, a new requirement took effect for banks and credit card processors to report payments to merchants and to the IRS, and the first Form 1099-K was issued in 2012.

Following the growth and popularity of the gig economy, changes were made last year through the American Rescue Plan Act requiring gig platform companies and other Third-Party Settlement Organizations (TPSOs) like PayPal or Venmo to report significantly more Forms 1099-K Payment Card & Third Party Network Transactions for payments they make to recipients in 2022. TPSOs will need to file Form 1099-K when they pay a single recipient at least $600 or more during the calendar year, a stark difference from the previous $20,000 threshold paid over 200 transactions afforded to these companies.

With a lower threshold, organizations will have more backup withholding risk and an increased volume of 1099 forms that need to be issued and filed with government agencies, increasing the risk of IRS and state penalties. Further complicating matters, over the last few years, many states adopted direct state filing requirements for Form 1099-K that have much lower thresholds and transaction limits.

Form 1099-MISC

In 1982, the IRS retired Form 1099-NEC and replaced it with Form 1099-MISC, which is used to report rent, royalties and other income. Perhaps the most notable use of Form 1099-MISC was to report nonemployee compensation in Box 7 of the form. However, for the 2019 tax season, nonemployee compensation was shifted back to the Form 1099-NEC.

Conflicting deadlines for Form 1099-MISC led the IRS to issue erroneous penalties to filers and as a result, the IRS changed the non-employee compensation requirements starting with the 2020 season.

Form 1099-NEC

At the end of 2018, the IRS announced that nonemployee compensation previously reported in Box 7 of Form 1099-MISC would need to be reported on a revived version of Form 1099-NEC, beginning with the 2020 filing season.

While a new form for nonemployee compensation seems straightforward, the IRS failed to include 1099-NEC in the Combined Federal State Filing (CF/SF) program, forcing 36 states and the District of Columbia to quickly enact their own direct reporting requirements. To relieve the burden of businesses filing 1099s directly with the state, the IRS added Form 1099-NEC to the CF/SF program during the 2021 tax season. However, it was a little too late. Most states did not modify the requirement to file the nonemployee compensation directly for the 2021 season, opting to continue to receive the information directly from businesses.

Not surprisingly, the shift to a new form for nonemployee compensation, followed by two years of inconsistent reporting requirements, created significant confusion among small and midsize businesses. In fact, a Sovos poll of more than 1,000 tax and accounting professionals found that 51% of poll respondents indicated they did not comply with their 2020 Form 1099-NEC state reporting obligations. As a result, these organizations are at risk of state tax penalties associated with failing to file an information return as required.

While the various versions of Form 1099 have increased exponentially, and the filing dates and various thresholds have changed consistently, it’s clear that compliance is getting even more challenging and businesses are caught in the crosshairs.