There’s a new twist on income reporting that freelancers will need to take note of on their 2020 tax return. The IRS has introduced Form 1099-NEC, a separate form from the standard Form 1099-MISC. This new form is one that you as a freelance business owner should receive from any client you did work for totaling $600 or more in 2020, prior to filing your taxes. It will take the place of Form 1099-MISC for this purpose.
The difference between Form 1099-MISC and Form 1099-NEC
As you are likely familiar, Form 1099-MISC is the form you have, up to this point, received from your clients that states the amount they paid you for reporting on your tax return. As a freelance business owner, you were also responsible for sending out Form 1099-MISC to any subcontractors you use for the same purpose. However, Form 1099-NEC now takes the place of Form 1099-MISC, so don’t be surprised when you start receiving these from your 2020 clients!
Here’s what freelancers need to know:
The new Form 1099-NEC is specifically for reporting independent contractor income, also known as non-employee compensation (NEC). NEC is defined by the IRS as payments to individuals who are not on payroll but who work for a company on a contract basis to complete a project or assignment. These are the payments that were traditionally reported in box 7 of a 1099-MISC form. Now they will be reported on Form 1099-NEC.
According to the IRS, your familiar 1099-MISC form will now be used only to report miscellaneous payments of $600 or more to individuals for:
· Other income payments (excluding self-employment activities)
· Medical and health care payments
· Crop insurance proceeds
· Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish
· Payments to an attorney
· Any fishing boat proceeds
Other key changes that freelancers should be aware of on this year’s tax return
Cryptocurrency is under the IRS microscope. The first question on Form 1040 this year is: At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency? If you are freelancer buying, selling, being paid with, or otherwise involved in cryptocurrency, you’ll need to be prepared to report this to the IRS.
If you made a monetary charitable contribution, the coronavirus relief bill may give you a tax deduction. Under a provision in the coronavirus relief bill, you may be eligible to reduce your taxable income by up to $300 for any charitable contribution you made by check, cash, or credit card (not hard goods). You must have proper documentation including a receipt from the charitable organization for this purpose.
Economic Impact Payments may affect your taxes. While the 2020 Form 1040 is not yet final, Line 30 is labelled for a government recovery rebate credit which correlates with any stimulus payments you may have received. Depending on your situation, you may receive an additional credit if your 2020 tax return has a smaller adjusted gross income amount than the one that was used to calculate the initial stimulus check or if you have additional dependents.
Be prepared for changes coming to freelance income reporting on your 2020 tax return. It’s clear from both the introduction of Form 1099-NEC, and the fact that on your 2020 tax return the IRS is also requiring self-employment income to be reported separately from W-2 income, that this is an area of focus for the agency. This, along with the other changes you’ll see on this year’s tax return mean freelancers should pay special attention to ensuring that they report all income and do so correctly, to avoid receiving an audit notice or other inquiry from the IRS.
By taking note of these changes and the other changes mentioned above now, you’ll be better prepared to file your taxes early and accurately for 2020, while taking advantage of any new opportunities to reduce your tax obligations through coronavirus related programs.