Form 1099 reporting is oftentimes straightforward, but there can be gray areas as to how to report certain payments and which form should be used. SPS/GZ has had many clients ask, “Where should I report payments made to an attorney, Form 1099-NEC or Form 1099-MISC?” Prior to 2020, attorney fees aggregating $600 or more were reported on Form 1099-MISC in Box 7, non-employee compensation. In tax year 2020, the Internal Revenue Service resurrected Form 1099-NEC, which was discontinued in 1982, to replace Box 7 on the 1099-MISC form. This change did cause some confusion since now many companies had to use two separate forms depending on the type of payments that were made. When reporting attorney fees here are some things to consider
Generally, corporations including LLCs that are taxed as C or S corporations, do not need to receive a 1099 form. However, attorney fees that are paid to a law firm that is incorporated are an exemption to this rule and should receive a 1099 form.
Attorney fees, over $600, that are paid as part of services they performed in the course of an entity’s trade or business should be reported on Form 1099-NEC in Box 1.
In contrast, gross proceeds paid to an attorney as part of a settlement agreement are reported on Form 1099-MISC in Box 10.
If an attorney makes a payment to a client as part of a settlement, the attorney would not need to report the payment on a 1099. Actually, the defendant in the lawsuit would have the obligation to report the settlement payment to the client.
An example of gross proceeds paid to an attorney would be payments made by an insurance company, or other organization, in the full amount to an attorney to settle a claim. In this case, the insurance company/organization would file two forms: a 1099-MISC reporting the amount paid to the attorney in Box 10 as part of a settlement and a 1099-MISC to the attorney’s client in the full amount of the settlement reported in Box 3. The attorney who received the settlement payment and paid the client directly for the settlement would not need to file a 1099 to report the payment.
The major reason the IRS brought back the Form 1099-NEC was to alleviate confusion with the varying filing deadlines based on type of payments being reported on Form 1099-MISC. Prior to 2020, the 1099-MISC had a different deadline for Box 1 payments, non-employee compensation, versus other payment types being reported on the same form. Now the 1099-NEC form that reports non-employee compensation payments has a filing deadline of January 31st, while the other payment types being reported on Form 1099-MISC have a filing date of March 31st.
It is important that companies and attorneys, know the rules for 1099 reporting to avoid costly penalties. The IRS heavily audits these forms and are quick to issue penalties for forms that are filed incorrectly or late. Now that the IRS has separate forms with specific filing deadlines, it will make it much easier for the IRS to track late filings and issue penalties. The late filing penalty is $50 per form if you file within 30 days of the deadline. After 30 days but before August 1st, the penalty increases to $110 per form. After August 1st, the penalty is $270 per form. If a company blatantly disregards their reporting requirement, a penalty of $560 per form penalty can be accessed.
SPS/GZ is a full-service tax reporting firm that provides personalized service and exceptional support, utilizing state-of-the-art technology to create and e-file Forms 1099, Affordable Care Act tax forms, and Forms 3921 and 3922. Reach out today at firstname.lastname@example.org or call at (888)375-3049.