What is Form 1099-NEC?
Form 1099-NEC is part of the 1099 series of information returns. Starting in 2020, the IRS requires business owners to report payments to non-employees on Form 1099-NEC. In previous years, businesses reported those payments in box 7 on Form 1099-MISC.
The 1099-NEC form is not a replacement for Form 1099-MISC. It’s simply a different form for reporting non-employee compensation. Form 1099-MISC continues to be used for other types of payments, such as rents, royalties, fishing boat proceeds, and payments to an attorney for legal services.
What is nonemployee compensation?
Nonemployee compensation is any payment to an independent contractor who performs a service for your trade or business. This can include fees, commissions, prizes, awards, and other forms of compensation.
Nonemployee compensation is treated differently than wages paid to an employee. When you pay an employee, you generally have to withhold income tax and payroll taxes from their wages. At the end of the year, you issue a W-2 showing the income the employee earned and the taxes withheld from their paychecks.
When you hire an independent contractor, you’re generally not responsible for withholding income taxes, Social Security, or Medicare taxes from their compensation. The worker is responsible for paying those taxes out of their own income. Instead of issuing a Form W-2 to the worker, you issue a 1099 NEC, which reports the total payments you made to them during the prior year.
Further reading: Independent Contractor vs. Employee: What’s the Difference?
Who needs to file 1099 NEC?
Your business needs to file a 1099 NEC for each independent contractor if you meet all of the following conditions:
- The payment was made to someone who is not your employee
- The payment was made for services in the course of your trade or business
- You paid an individual, single-member LLC, partnership, or LLC taxed as a partnership
- The payments totaled $600 or more during the tax year
Additionally, you will need to send Form 1099-NEC if you withheld any federal income tax from nonemployee compensation payments under the backup withholding rules, regardless of the amount.
You don’t have to file a 1099 NEC for payments to corporations or LLCs taxed as corporations, although there are a few exceptions. Those exceptions are outlined in the IRS Instructions for Form 1099-MISC and 1099-NEC.
You also don’t need to complete a 1099-NEC for payments made by credit card or debit card or via a third-party payment processor, like PayPal or Stripe. Payments made via these methods are included on a 1099-K issued by the financial institution or payment processor.
Suggested reading: Form 1099 Filing and Reporting Requirements
When do you need to file 1099 NEC?
You’re required to send Copy B of Form 1099-NEC to payees and file Copy A with the IRS by January 31. Filing can be done with paper copies or electronically. If you need it, Copy 1 is for filing a copy with a state tax department.
If any of those dates fall on a weekend or holiday, the filing deadline shifts to the next business day.
Be sure to mark those dates on your calendar because the penalty for filing Form 1099-NEC can be stiff. For small businesses that miss the due date, the penalty varies from $50 to $580 per form, depending on how long past the due date you issue them. The IRS caps those penalties at $1,113,000 for seriously delinquent forms.
And intentionally disregarding your filing obligations can cost you dearly. That penalty is $550 per form, with no cap.
How to file Form 1099-NEC
As far as IRS forms go, completing Form 1099-NEC is pretty simple. You just need the following information:
- Your business’s information, including your business name, street address, telephone number, and taxpayer identification number
- The payee’s identifying information, including their name, mailing address, and taxpayer identification number. There’s also a box for an account number if you have multiple accounts for the payee.
- The amount of nonemployee compensation paid during the tax year
- Federal income tax withheld, which is usually zero unless you are required to follow backup withholding rules for the worker.
- State-specific information, such as any state income tax withheld, the worker’s state identification number, and the amount of nonemployee compensation applicable to that state.
While you can find a PDF version of Form 1099-NEC at IRS.gov, don’t just download the form, fill it out, and mail it in. The IRS requires a scannable Copy A. To comply with IRS rules, you can:
- Order official IRS information returns, including a scannable copy Copy A for the IRS, at www.IRS.gov/orderforms
- File the form electronically using the IRS Filing Information Returns Electronically (FIRE) system at www.IRS.gov/FIRE
If you paper-file forms that you order directly from the IRS, you’ll also need to include Form 1096. Form 1096 is essentially a cover sheet for submitting information returns to the IRS. You’ll need a separate Form 1096 for each type of information return you file, including Form 1099-NEC, 1099-MISC, and more. If you e-file your 1099 forms, you don’t need to worry about attaching Form 1096.
Why would I receive a 1099 NEC?
If you work as an independent contractor, freelancer, or self-employed individual, you should receive a 1099-NEC from any business that paid you at least $600 during the tax year. However, if you were paid by credit or debit card or through a third-party payment processor like PayPal, you shouldn’t receive a 1099-NEC for those payments.
The business is required to send you a copy of your 1099-NEC form by January 31 of the following tax year. They will also send a copy to the Internal Revenue Service (IRS). As a result, the IRS expects to see that compensation reported on your tax return — whether you report your business income and expenses on Schedule C attached to your Form 1040 or file a separate business tax return.
How is 1099-NEC different from 1099-MISC?
Form 1099 NEC isn’t a new form, but it hasn’t been used since the 1980s. Back then, the form had one box for businesses to report fees, commissions, and other non-employee compensation paid to independent contractors. Starting with the 1983 calendar year, the IRS moved that information to Form 1099-MISC, the form used to report various kinds of miscellaneous income.
That worked well for a while, at least until the Protecting Americans from Tax Hikes (PATH) Act of 2015 came along. The PATH Act changed the due dates for businesses to send copies of 1099-MISC to the IRS.
Up until that point, the due date for sending Form 1099-MISC to the IRS was February 28 (March 31 if filing electronically). But the PATH Act changed the due date to January 31 if the form included nonemployee compensation in box 7, whether the business issued its 1099 forms on paper or via e-file. If the form didn’t include nonemployee compensation in Box 7, the business had until February 28 to file paper forms or April 1 to file them electronically.
Perhaps not surprisingly, having multiple filing deadlines for one form created a lot of confusion and resulted in a lot of late filing penalties.
To alleviate that confusion, the IRS bought back Form 1099-NEC in 2020. The new Form 1099-NEC takes the place of boxes 7 and 9 on the old 1099-MISC form. Businesses use it to report nonemployee compensation as well as direct sales of $5,000 or more of consumer products. There are also boxes for federal income tax and state income tax withheld, which may be required for taxpayers subject to backup withholding.
Form 1099-MISC is still used for other types of payments, such as rents, royalties, and other miscellaneous income categories. You can find a complete list of the types of income that go on both of these forms in the IRS Instructions for Form 1099-MISC and 1099-NEC.
What else do you need to know about 1099-NEC?
If you hire independent contractors or freelancers in your small business, it’s a good idea to get in the habit of requesting IRS Form W-9 before issuing any payments to them.
Form W-9 is used to collect payments from U.S vendors and contractors. It requires the vendor or contractor to provide their name, address, taxpayer identification number, and business structure.
It also asks them to certify that they aren’t subject to backup withholding.
Getting a W-9 before issuing payments ensures you won’t be scrambling to get the payee’s full name, address, and taxpayer identification number during tax season.
At the end of the tax year, you’ll have everything you need to complete those 1099 tax forms and file them electronically or by mail.
Bottom line
Whether you receive a 1099-NEC or need to issue one to a contractor, having clear, accurate, and up-to-date books are essential when it’s time to file your taxes. Your Bench bookkeeper can provide detailed year-end financial statements, including a 1099-specific report, that make tax filing a breeze.
In January, your Bench-provided 1099 report can tell you:
- Who you need to file 1099 NECs for
- How much you paid each person and what they were paid for, including the transactions associated with those payments
We’ll even let you know whether you need to file an NEC or MISC form for that 1099.
If you’d prefer an even more hands-off solution, we can also help! Our Premium plan includes year-round on-demand income tax advisory support in addition to an all-star team to prepare and file your tax return.
