The 411 on the 1099: What You Need to Know

The 411 on the 1099

Ready for a blast from the past?

OK, maybe that description is a bit ambitious, but we think it’s interesting that the government is now bringing back Form 1099-NEC, which was last used back in 1982, during the Reagan administration. For the last few decades, business owners and local government were responsible for using the Form 1099-MISC to report nonemployee compensation. But with the return of Form 1099-NEC, municipalities can say hello to a revamped form. We know it’s been a while since you dusted off your signature 80’s shoulder pads, leg warmers, and Walkman. So, we figured you’d want a refresher on this form as you head into the 2020 tax season. Here’s what you need to know:

You’re familiar with Form 1099-Misc – it’s like a W2 designed to report certain types of compensation to individuals and unincorporated entities based on what the business or municipality has paid them throughout the year. It’s not disappearing, but for the 2020 tax year, payors will no longer report nonemployee compensation, such as payments to independent contractors, on this form. Instead, that’s where Form 1099-NEC comes into play (download it here).

Generally, you’re required to file a Form 1099-NEC if you meet the following conditions:

  • You paid someone who’s not your employee
  • You paid for services during your trade or business
  • You paid an individual, partnership, estate, or corporation (in some cases)
  • You paid at least $600 to the payee during the year

Miscellaneous service payments other than nonemployee compensation should still be reported on Form 1099-MISC. This includes payments of at least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest, and payments of at least $600 in:

  • Rents
  • Payments to an attorney (other than fees for services)
  • Section 409A deferrals
  • Nonqualified deferred compensation

There are other categories that are less likely to be applicable to local municipalities, for further clarification, please reference this IRS link.

For 2020, the IRS requires you to furnish the statements to recipients and file Form 1099-NEC on or before January 31, 2021. This differs from the Form 1099-MISC IRS filing deadlines: if you file on paper, you must file Form 1099-MISC by March 1, 2021; if you file electronically, you must file Form 1099-MISC by March 31, 2021. The deadline for furnishing the 1099-MISC to the recipient is the same, January 31, 2021. Determining which form you will need to file depends largely on the agreement or relationship your municipality has with a given recipient. As a best practice, we suggest that municipalities carefully review the IRS requirements for independent contractor status and always get W-9 forms completed before making any payment to a new vendor or independent contractor. This will save tremendous time at year-end and reduce your chances of getting slammed with IRS penalties. As always, if you run into confusion navigating this change, please contact our dedicated team at RBT.

 

Municipalities Can Build Financial Resilience in the COVID-19 Era and Beyond

Municiplaities Resilience Covid-19

The COVID-19 pandemic and the accompanying shutdown have brought financial challenges to municipal governments throughout New York State.

Sales tax revenues declined steeply across the state in April and May compared to 2019, and state aid will be cut or delayed. Unemployment rates may affect residents’ ability to pay property taxes, creating further worries about revenue as we head toward the fall budget season.

There are strategies that county, city, town and village governments can undertake to mitigate the effects of the crisis: finding alternate ways to generate revenue and to cut costs to address short-term needs in the next 12 to 18 months; and making the budgeting process and financial practices more resilient to address long-term goals for the next three to five years.

The starting point can be a two-part analysis: First, a short-term analysis of cash flow to ensure the municipality can keep running in the next few months. Then a long-term forecast can determine if an economic upturn will resolve issues, or if there are deeper problems that need repair.

The COVID-19 pandemic has caused immediate fiscal pain around the state.

A survey by the Association of Towns of the State of New York (AOT) found that in the month of March, towns in New York lost roughly $215 million in revenue between drops in sales tax, mortgage recording taxes, license and permit fees and justice court fines. AOT noted in its survey findings that businesses in the state were operating as normal for the first half of March. Sales tax made up the largest portion of the loss, according AOT.

The New York State Comptroller’s Office has reported that April sales tax revenues in New York’s counties and cities dropped by 24.4 percent compared to April 2019. May’s sales tax collections fell 32.2 percent compared to May 2019.

State tax receipts for May fell by 19.7 percent compared to May 2019, a drop of $766.9 million, the Comptroller reported. Personal income tax withholding revenues dropped 9 percent in May compared to May 2019.

In bad times, the Government Finance Officers Association recommends taking a financial diagnostic review of operations and the budgeting process to provide officials of a financially distressed municipality with an in-depth look at their budgeting and fiscal practices. This helps to assess financial health and to identify areas for strategic cost savings and alternative sources of revenues.

In such a climate, it is crucial that local governments find a way to create what the GFOA calls “culture of frugality,” and find responsible, cost-effective solutions

Short-term measures, meant to affect 12 to 18 months out, are cost-cutting and alternate-revenue strategies, such as dipping into reserves to bridge a budget gap. With each measure, a government must consider whether the move will be a sound long-term strategy, or if a cut today could lead to increased costs down the line.

A number of school districts in the Mid-Hudson region used a variety of these tactics to get through the 2020-2021 school budget season, avoiding deeper cuts to teaching staff or academic programs by leaving jobs unfilled after employee retirements, and using fund balance to offset tax levy increases to spare taxpayers and keep the budget under the statutory tax cap.

Longer-term planning for recovery after crisis requires a data-based approach that addresses root causes of financial stress. This means requires studying the economic and social environment of a municipality, analyzing budgeting processes and reforms, and creating an operational plan.

Now is the time for government leaders to look for ways to mitigate the crisis, to build resilience through 2020 and beyond.

Over the next several articles, we will discuss these approaches in more depth, with recommendations for concrete steps that local governments can take.