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November 5, 2020
2020-2630

North Carolina issues guidance on the filing of Form W-2 and Form 1099 for tax year 2020; new Form 1099-NEC will be accepted

The North Carolina Department of Revenue has issued various updates on the requirements that apply to the filing of the 2020 Forms W-2 and other information statements due in 2021.

Filing Forms W-2 and 1099 electronically

The North Carolina Department of Revenue announced that it will again automatically waive the penalty for failure to electronically file Form NC-3, Annual Withholding Reconciliation, and Forms W-2/1099 for calendar year 2020. However, the deadline for filing, whether electronically or on paper, remains January 31, 2021.

Taxpayers do not need to request a penalty waiver when they file Form NC-3 and the required

Forms W-2/1099 on paper. However, if a taxpayer receives a proposed assessment of the $200 penalty that would normally be assessed for failure to file electronically, the taxpayer should contact the Department (see the notice for instructions).

Forms 1099-MISC and 1099-NEC

The Department will conform to the new IRS requirement that, beginning in tax year 2020 (filed in 2021), nonemployee compensation is reported on the new Form 1099-NEC rather than on Form 1099-MISC.

Until further notice, the Department will continue to only require the filing of Forms 1099-MISC and 1099-NEC if the statements reflect state income tax withholding.

New requirement to withhold state income tax from nonemployee compensation of more than $1,500 and report on new state Form NC-1099M

As we previously reported, businesses that pay nonemployees more than $1,500 during a calendar year must deduct and withhold North Carolina income tax at a rate of 4%. (EY Tax News Alert 2020-0431, 2-25-2020.)

A payee can be any of the following:

  • A nonresident contractor
  • An ITIN contractor
  • A person who performs services in North Carolina for compensation but fails to provide the payer a valid taxpayer identification number (The Department must notify a payer that a taxpayer identification number is not valid.)

Effective January 1, 2020, businesses are required to use new Form NC-1099M, Compensation Paid to a Payee,to report the nonwage compensation paid to a payee for services performed in North Carolina and the North Carolina income tax withheld from that income. (State Forms NC-1099-ITIN, Compensation Paid to an ITIN Contractor, NC-1099PS, Personal Services Income Paid to a Nonresident, have been discontinued.)

Note that if a business is required to complete a federal Form 1099-MISC or Form 1099-NEC to report the nonemployee compensation paid to a payee, the filing of Form NC-1099M is not required. Businesses are reminded not to use NC-1099M to report wages (Form W-2 is used for that purpose).

Businesses using new federal Form 1099-NEC to report nonemployee compensation to the federal government are required to submit, as a part of the taxpayer's annual Form NC-3 filing requirement, a paper or electronic copy of any federal Form 1099-NEC statement that reports North Carolina income tax withheld.

For additional details, see instructions on Form NC-1099M and Directive TA-19-1, Expansion of Requirement to Withhold State Income Tax from Certain Non-Wage Compensation Recipient.

For more on North Carolina withholding tax, go here. For more on filing Forms NC-3/W-2/1099 electronically, go here.

Ernst & Young Insights

Starting with tax year 2020 (filed in 2021), the IRS requires that nonemployee compensation be reported on new Form 1099-NEC rather than Form 1099-MISC. This reporting change was made because Forms 1099-MISC were required to be filed by February 28 (March 31 if filed electronically) except if the Form 1099-MISC included nonemployee compensation, in which case the filing deadline was January 31. With the separate Form 1099-NEC, it will be easier for businesses to comply with the differing filing due dates.

Businesses should also note that the although North Carolina participates in the federal Combined Federal/State Filing (CF/SF) program for the filing of Forms 1099, Form 1099-NEC is not included in the program. Accordingly, a Form 1099-NEC that shows North Carolina state income tax withheld will need to be filed separately with the Department. (IRS Publication 1220 for tax year 2020, p. 22-24.)

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Contact Information
For additional information concerning this Alert, please contact:
 
Workforce Tax Services - Employment Tax Advisory Services
   • Debera Salam (debera.salam@ey.com)
   • Kristie Lowery (kristie.lowery@ey.com)
   • Kenneth Hausser (kenneth.hausser@ey.com)

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