Prior to 2020, if you were a freelancer or your small business hired contracted work, you either issued or received a 1099-MISC.
Now, the IRS has introduced the new Form 1099-NEC, a new form just for reporting independent contractor income (officially known as “non-employee compensation”). If you work with contractors or do contracting work as someone who’s self-employed, here’s everything you need to know.
What is Form 1099-NEC?
The 1099-NEC (preview here) is a new form specifically for reporting non-employee compensation—currently defined as payments to individuals not on payroll on a contract basis to complete a project or assignment. This would include all independent contractors, gig workers, or self-employed individuals who previously had their payments reported in box 7 of a 1099-MISC form.
1099-NEC vs 1099-MISC
The 1099-NEC is now used to report independent contractor income.
But the 1099-MISC form is still around, it’s just used to report miscellaneous income such as rent or payments to an attorney.
Although the 1099-MISC is still in use, contractor payments made in 2020 and beyond will be reported on the new form 1099-NEC. The due date for the 1099-NEC is January 31 in the year following the applicable tax year. If January 31 does not fall on a business day, the due date will be moved to the next business day. The 1099-MISC is due March 1 if filed by paper, March 31 if filed electronically. If these dates don’t fall on a business day, the due date is moved to the next business day.
Who requires a Form 1099-NEC?
If your business paid a contractor more than $600 in a tax year, you’re required to file Form 1099-NEC. However, if the independent contractor is registered as a C corporation or S corporation, a 1099-NEC will not be required. This information can be found on the contractor’s Form W-9.
Do not file a 1099-NEC for employees. Any employees will need to have a Form W-2 submitted to report wages, tips, and other compensation paid during the tax year. There are significant penalties for misclassifying employees as contractors. Our blog post on the differences between the two can provide you with a refresher before submitting a 1099-NEC.
Who requires a Form 1099-MISC?
If your business paid an individual or LLC at least $600 during the year in rent paid, legal settlements, or prize or award winnings, you are required to file a 1099-MISC.
Who files the Form 1099-NEC?
If your business hired a contractor and paid them more than $600 in a year, it’s your responsibility to file a Form 1099-NEC with the IRS and send a copy to the contractor.
How to file Form 1099-NEC
For every Form 1099-NEC, there are two copies that will be filled out with the same information: Copy A and Copy B.
If you hired an independent contractor and paid more than $600 in the year, you must report their total earnings in that year. Copy A is for the IRS while Copy B is to be sent to the contractor.
If you are the independent contractor receiving Copy B, it’s not your responsibility to file the Form 1099-NEC. However, you should request a copy of the form from your client for your records. All of your income will be reported on a Schedule C.
What you need to file
If you are the payer, request a Form W-9. This will include their:
- Legal name or business name if applicable
- Business entity (sole proprietor, partnership, corporation)
- Current address
- Taxpayer identification number (SSN, ITIN, or EIN)
It is the responsibility of the payer to file the Form 1099-NEC and the form will provide you with all the information you need to fill out any 1099 form. If you work with a payroll service (like Gusto) to pay your contractors, they will file and mail 1099 forms for each contractor. Your input will just be their Form W-9 up front.
Check your bookkeeping records and confirm the total amount that was paid to each contractor over the course of the tax year. Use this information to finish filling out the Form 1099-NEC.
Submitting Copy A to the IRS
Copy A of Form 1099-NEC must be submitted to the IRS by January 31, 2020, either by e-file or by mail.
A physical copy of Form 1099-NEC (and other IRS publications) can be requested through the IRS website. If you are opting to file a paper copy, you will also need to provide Form 1096 as a cover sheet. Once both are completed, you can mail them to the IRS.
If you want to file electronically, you will do so through the IRS’s FIRE (Filing Information Returns Electronically) System. You must have a software or service provider that will create the file in the proper format—a scanned or PDF copy will not be accepted.
Before using FIRE, you will need a Transmitter Control Code (TCC). This must be requested through mailing or faxing Form 4419 to the IRS. This must be submitted at least 30 days before the tax deadline for your Form 1099-NEC. The IRS will contact you with your TCC which can be used to create an account with FIRE.
Submitting Copy B to the contractor
You can email Copy B to your contractor, but first you will need their consent. Consent will need to be obtained through the same way you plan to be sending it (e.g. email asking for consent if emailing the forms). If consent cannot be obtained, you will have to mail it.
To comply with IRS rules, your request for consent must include the following:
- Affirmation of the fact that, if the recipient does not consent to receiving an electronic copy, they will receive a paper one.
- The scope and duration of their consent. For instance, are they agreeing to receive an electronic copy this year, or every calendar year they work for you?
- How to request a paper copy from you, even if they have given consent to receive an electronic one.
- Instructions on how to withdraw consent. They may withdraw consent at any time in writing, electronically or on paper. You must also confirm their withdrawal in writing.
- Under what conditions the statement may no longer be provided—for example, if the contractor’s contract is cancelled, or if you end up paying them less than $600 for their services.
- The procedure they need to follow to update their information with you.
- A description of the hardware and software they need to view and print the form.
- A date at which the form will not be available. For example, if you are making it available to download via your company’s website, you must tell them at what point in time the form will be removed from your servers.
Once you’ve received consent from the contractor, you are free to send them their Copy B electronically.
Submitting 1099 forms with your state
Some areas require you to also file 1099 forms with the state. The following states do not require 1099 forms to be submitted:
- New Hampshire
- New York
- South Dakota
Some states participate in a program where the IRS will forward relevant forms only if they were filed electronically. Check with your CPA to ensure you are compliant with any of your state’s 1099 filing requirements.
What is the 1099-NEC filing deadline?
The due date to file Copy A of Form 1099-NEC with the IRS is January 31 of the following year. If this date does not fall on a business day, the due date will be the next business day.
Similarly, the deadline to provide Copy B of Form 1099-NEC to contractors is January 31 of the following year.
What are the penalties for missing the filing deadline?
If you missed the deadline, you will pay a penalty depending on how late the payment is. These penalties are:
- $50 if you file within 30 days
- $100 if you file more than 30 days late, but before August 1
- $260 if you file on or after August 1
The amount will be determined based on when you file the correct information return. If you are unable to file on time, you can request an extension by submitting Form 8809 to the IRS. However, you will still need to supply the 1099-NEC forms to any contractors by January 31.
Get to know common tax forms
- Form 1099-K: Everything You Need to Know (4 minute read time)
- What is a W-9 Form & Why You Need To Fill It Out (7 minute read time)
- How to Fill out Form 8829 (5 minute read time)
- What is Form 4868? (How to Get a Tax Extension) (3 minute read time)
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