Equity Plan Solutions Updates on FICA COLA and Form 1099-NECUnited States | November 2, 2020
FICA Cost-of-Living Adjustment
Per the SSA’s announcement, the maximum amount of earnings subject to Social Security tax will increase to $142,800 in 2021 (up from $137,700 in 2020). The Social Security tax withholding rate will remain at 6.2%. With the new wage cap, the maximum withholding for Social Security will be $8,853.60.
Medicare tax rates also remain the same and are not subject to a maximum. The threshold at which the additional Medicare tax applies is likewise unchanged.
The IRS has announced a new form that will be used to report nonemployee compensation beginning with tax year 2020. Previously, nonemployee compensation was reported on Form 1099-MISC; starting with compensation paid this year, this compensation will be reported on new Form 1099-NEC.
Form 1099-NEC will be used to report any compensation paid to nonemployees, including outside directors, consultants, and independent contractors. It is used for both cash compensation and stock compensation (as well as any other form of compensation paid to these individuals).
In the context of stock compensation, any income that was previously reported in box 7 of Form 1099-MISC will be reported in box 1 of Form 1099-NEC. See the Instructions to Form 1099-MISC and Form 1099-NEC for more information. Forms 1099-NEC reporting income for 2020 must be filed with the IRS by February 1, 2021 (normally the filing deadline is January 31, but this day falls on a Sunday next year).
There are some situations where income will still be reported on Form 1099-MISC. The two that come to mind are equity awards paid out after an employee’s death, or payout of equity awards transferred to an ex-spouse in a divorce settlement. In these cases, the income attributable to the nonemployee (e.g., the employee’s estate, beneficiary, or ex-spouse) is reported in box 3 of Form 1099-MISC.
In most cases, income for stock plan transactions will be reported on either Form 1099-MISC or Form 1099-NEC, not both. One situation where the same income will be reported on both forms, however, is when a violation of Section 409A occurs.