If you are an owner, operator, or on the accounting side of your restaurant business, you’ve probably been hearing about the new 1099-NEC form for non-employee. This new form goes into effect with your 2020 tax year.
There are many resources available surrounding the new 1099-NEC forms and the changes to the existing 1099-MISC. However, it can be difficult to sort through the enormous amounts of information, because a lot of it doesn’t have to do specifically with the restaurant industry.
And yet, this form is especially important for restaurants this year, especially after the changes in the industry prompted by the COVID-19 pandemic. When switching to a new business model or to new off-premise channels, many restaurants increased their partnerships with independent contractors. Whether delivery drivers or temporary employees, if your restaurant hired temporary contract workers this year, you may need to file the new 1099-NEC form. Other types of non-employee compensation include payments you made to independent contractors such as web site designers, social media consultants, and others who did work for your restaurant business, but were not on your payroll.
In short, the 1099-NEC is the form your business will use to report to the IRS the payments you made to independent contractors, starting in the 2020 tax year. Let’s dive into the details to see what it means for your business.
New Form 1099-NEC
Starting in the tax year 2020, all nonemployee compensation (NEC) payments should be reported on the new 1099-NEC form. Any money paid to freelancers, independent contractors, “gig workers,” and other nonemployees should be reported in Box 1 of this form. This form is due by the same deadline for reporting Form W-2 employee compensation (more on that below).
Form 1099-NEC isn’t an entirely new form. The last time it was used was in 1982, before it was retired and replaced with the Form 1099-MISC. However, the IRS reintroduced 1099-NEC last year, replacing box 7 on Form 1099-MISC.
We’ll discuss the difference between these two 1099 forms later. But first, it’s helpful to know when to use the new form for your restaurant taxes.
What is nonemployee compensation?
The terminology between gig worker, independent contractor and freelancer can all be a bit confusing, especially since they are used interchangeably in the media.
For reference, the IRS defines nonemployee compensation in the Instructions for Forms 1099-MISC and 1099-NEC (2020) as the following. If a payment meets these four conditions, it should generally be reported on the1099-NEC:
- You made the payment to someone who is not your employee.
- You made the payment for services in the course of your trade or business.
- You made the payment to an individual, partnership, estate, or, in some cases, a corporation.
- You made payments to the payee of at least $600 during the year.
Examples of Nonemployee Compensation
With these conditions in mind, examples of nonemployee compensation include payments you made over the course of the year to independent contractors that were more than $600. For restaurants specifically, there are a few common scenarios that involve nonemployee compensation.
For example, your restaurant may have started to work with in-house restaurant delivery drivers when expanding your off-premise delivery channels. If these workers were classified as contractors, they provided a service for your business, but they were not employees on your payroll. These are nonemployees.
Note: third-party delivery apps are not categorized as your nonemployees. These delivery drivers are the independent contractors of the delivery company, such as DoorDash, Uber Eats, Grubhub, etc.
Another common example of nonemployee compensation in restaurants: if you had issues attracting labor in the spring, during the fluctuations at the beginning of the COVID-19 pandemic, you may have temporarily added some staff to your restaurant schedule. If these workers were not added to your payroll, they would be classified as independent contractors.
To start pulling together numbers, consider using your restaurant accounting software to automate the reporting for wages paid out to independent contractors. Accuracy in these numbers is key to remaining compliant in case of an audit.
The difference between forms 1099-NEC and 1099 MISC
Essentially, the difference between forms 1099-NEC and 1099-MISC is that nonemployee compensation used to be reported in Box 7 of Form 1099-MISC. Now, Box 7 has been separated out into its own form. NEC payments are now reported in Box 1 of this new form, 1099-NEC.
Form 1099-MISC still exists, but it has been modified and redesigned. Nonemployee compensation is no longer included on 1099-MISC, but the form is still used to report miscellaneous income. You may need to use 1099-MISC for other business payments, like rent, certain medical or healthcare payments, and other specific costs.Your business may still need to file both forms. 1099-NEC is just for independent contractor payments of $600 or more, and 1099-MISC will be for other types of business payments.
When to file a 1099-NEC
In general, the Form 1099-NEC should be filed with the IRS by January 31 of each year. Because of the calendar days in 2020, the filing deadline for Form 1099-NEC is February 1, 2021 (the first business day after January 31).
In addition, a copy of the form should be sent to your vendors and independent contractors by the same deadline. There is no automatic extension available for the 1099-NEC form.
Who needs to file form 1099-NEC?
If your business pays individuals for services, and these individuals are not employees, you will be affected by this new change. Understanding your new tax obligations is particularly important if you hire “gig workers,” like restaurant delivery workers, that are classified as independent contractors.
You do not need to file the 1099-NEC form for any of your employees. They have their own dedicated form, Form W-2, that reports their wages. In addition, if an independent contractor is registered as a C corporation or an S corporation, you don’t need to file the 1099-NEC form for them.
As you add the 1099-NEC form into your tax filing procedure, there are some regulatory trends on the horizon to keep top of mind.
The IRS has always done audits for organizations on employment tax issues, which included reviewing Form W-9 and 1099 compliance. However, as the workforce continues to evolve, there is a renewed interest in cases regarding employment misclassification. As a result, Form 1099 audits are becoming more common.
Some states, like California, New York, and New Jersey in particular, are also implementing special reviews on businesses that are misclassifying employees as independent contractors. Even if a business is unintentionally misclassifying a worker, there can be heavy consequences for noncompliance.
State-level interest in increased audits stems from a couple areas. Misclassified workers aren’t protected under the same rights as employees, and they also don’t receive the same benefits. In addition, states are interested in capturing all available tax revenue. It is likely that employment tax audit examinations, especially for Forms 1099-MISC and 1099-NEC, will continue to increase in the future.
To proactively plan for the possibility of an audit, it is key to leverage your restaurant reporting software to accurately track all nonemployee compensation.
The IRS announced in Publication 1220 that information reported for the new Form 1099-NEC will not be included in the Combined Federal-State Filing (CF/SF) Program.
That means that if you are filing 1099-NECs for individuals that live in states that require submission of the Form 1099-NEC, you may need to submit a separate state filing in that jurisdiction’s required format.
Many states are now beginning to publish direct reporting requirements. As you start to prepare your tax documents for 2020, you will need to continue to check for IRS updates and individual state updates.
Steps to prepare your new 1099s for year end
Whenever there are changes to tax rules, you need to spend time reviewing your tax filing process with your accounting and management team.
First, make sure to educate your team on the changes to 1099-MISC reporting, so you can apply what you’ve learned to your organization. Start with these key questions:
- Do you know which of your vendors require 1099s?
- Do you have the required documentation?
- Do you have the tools to prepare your 1099s?
As you prepare your documents, it is a good idea to practice the three R’s: review, record, and reach out.
- Review financial data in your accounting system for accuracy.
- Record your vendor information, making sure that the vendor names and tax IDs are accurate and you have supporting documentation such as a W-9.
- Reach out to vendors early to get any missing information.
Finally, make sure to review all of your tax information early to avoid any surprises that may come up before the filing deadline.
This has been a tough year for many restaurants, and your financials may not look the same as in previous years. However, staying ahead of your 2020 taxes is essential to remain in compliance and be prepared for 2021. Armed with this information about the new Form 1099-NEC, you are ready to start the process.
Restaurant365 R365 offers the ability to track 1099-MISC, 1099-NEC, and 1099-INT transactions by vendor and organize 1099 processing by legal entity or common payer. The advanced setup and functionality of 1099 information in R365 allows more accurate tracking of vendor information for IRS reporting.
Restaurant365 incorporates restaurant accounting software, restaurant operations software, inventory management software, payroll + HR software, and scheduling software into an all-in-one, cloud-based platform that’s fully integrated with your POS system, as well as to your food and beverage vendors, and bank. Ask for a free demo of Restaurant365 today.