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ML BeneBits

EXAMINING A RANGE OF EMPLOYEE BENEFITS
AND EXECUTIVE COMPENSATION ISSUES

For the 2020 tax year, the Internal Revenue Service (IRS) moved reporting of certain nonemployee compensation, including current and deferred compensation paid to independent contractors and corporate directors, from Form 1099-MISC to revived Form 1099-NEC (see our previous LawFlash). However, according to IRS Publication 1220, released on October 20, 2020, “Form 1099-NEC, Nonemployee Compensation is not part of the Combined Federal/State Filing (CF/SF) Program,” so the IRS will not forward Form 1099-NEC to participating states.

The Combined Federal/State Filing (CF/SF) Program was established to simplify information return filing for payers. Through the CF/SF Program, the IRS electronically forwards information returns (original and corrected) to participating states. However, not every state participates in the CF/SF Program and not every state requires payers to file Form 1099-NEC. Thus, in order to avoid potential state penalties, it is important for payers to determine which states require the filing of Form 1099-NEC and by what date (historically, states that participate in the program have not received the returns until April or May).

Technically, filing Forms 1099-NEC would be due to all the states in the combined filing program (see list below), but a few of those states have announced that they do not want the forms, unless there is state withholding or the total compensation exceeds certain stated dollar amounts (all of which are over the $600 threshold for the form).

The following states participate in the CF/SF Program: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Georgia, Hawaii, Idaho, Indiana, Kansas, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, and Wisconsin.

It is also important to note that while reporting of some payments was moved from Form 1099-MISC to Form 1099-NEC, not all reporting of nonemployee compensation was moved. The IRS left on Form 1099-MISC the reporting of excess golden parachute payments and of any nonqualified deferred compensation payments that violate Section 409A. These payments are reported with the IRS on Form 1099-MISC by March 1, 2021 and then forwarded to the states participating in the CF/SF Program whereas Form 1099-NEC is filed with the IRS a month earlier but is not forwarded to participating states.