What is Form 1099-NEC?
Many businesses often hire independent contractors, like freelancers or attorneys, for short-term jobs. For federal income tax purposes, payments made to people who aren’t directly employed by the company must be reported to the Internal Revenue Service (IRS).
To report payments to people who work as independent contractors, companies use Form 1099-NEC. The IRS also requires companies to file a copy of the 1099-NEC form with them and mail another copy directly to the independent contractor.
The 1099-NEC was reintroduced in the 2020 tax year specifically to track non-employee compensation. It’s another variant of the 1099 compensation form. It also helps the IRS to predict how much tax revenue to expect from self-employed people. That’s because a Form 1099-NEC gives self-employed people an official document to attach to their 1040 tax return. This can replace the traditional W-2 tax refund form.
- A 1099-NEC Form is used to report taxable income earned by people who work as independent contractors rather than regular payroll employees. Any registered businesses must file 1099-NEC forms with the IRS to avoid legal problems in case of an audit.
- Pass-through companies, like LLCs, don’t need to receive 1099-NEC forms since they are separate entities.
- When preparing to file, you should have at least three copies of your 1099-NEC forms: one for the IRS, one for the contractor, and one for your business records.
- You have to send the forms out by January of the year after the independent contractor delivered their services. For example, if they worked for you in 2022, you will need to send the Form 1099-NEC by January 31, 2023.
- The IRS can issue monetary penalties of up to $550 for filing your 1099-NEC forms late or with incorrect information.
Why Do You Need to Send a Form 1099-NEC to Service Providers?
The IRS stipulates that a business is responsible for issuing Form 1099-NEC for services performed by someone who is not their employee. If you don’t do this, you could get into legal trouble in the event that the IRS audits your business.
The following services, trade, or business ventures require a 1099-NEC Form:
- Commissions, prizes, awards, and fees paid for services performed as a nonemployee.
- Compensation for services performed for your trade or business by an individual who is not your employee.
- Oil and gas payments for a working interest, whether or not services are performed.
- Expenses incurred for using an entertainment facility that you treat as compensation to a nonemployee.
- Federal executive agencies that make payments to vendors for services, including payments to corporations.
- If federal income tax hasn’t been distributed to an individual under backup withholding rules.
The following conditions must apply
before you are required to send 1099-NEC forms out.
You Are a Business
You don’t send a 1099-NEC to the plumber who installs your new bathroom. But if you are running a bed and breakfast that is registered as a business, you are generally required to send 1099-NEC forms to independent contractors who perform the same work. This is because the work would be classified as a legitimate business expense.
The Income Is Above the Official Threshold Amount
Under the threshold of $600, you are not required to mail a 1099-NEC form to independent contractors or an attorney who worked for your company.
That doesn’t mean that the contractor can avoid paying taxes on that income. It simply means you have no official obligation to provide that information to them.
They Are Independent Contractors, Not Employees
The IRS distinguishes one from the other by using three different criteria:
- Behavioral Control: Does your company have a right to control what the worker does and how they perform?
- Financial Control: Does your company have a say in the material aspects of a worker’s job? Do you decide which expenses are reimbursed or who provides the necessary tools and supplies?
- Contractual Relationship: Is there a written contract? Are benefits such as pension, insurance, and vacation or sick days part of that contractual obligation?
When these three criteria are met, the IRS considers the worker an employee of your company. This means that you are responsible for filling out a W-2 and paying your share of the FICA taxes.
If these criteria are not met, the worker is an independent contractor responsible for paying their own taxes. These individuals receive a 1099-NEC.
The Service Provider Is a Pass-Through Legal Entity
You are not required to send a 1099-NEC to every individual who does work for your company as an independent contractor.
Incorporated businesses—i.e., businesses that are legally considered separate entities and that file taxes as such—do not receive 1099-NEC forms. Neither do limited liability corporations (LLCs) since they elect to be treated as corporations for tax purposes.
What Is the Deadline for Sending Out 1099-NEC Forms?
The forms must be sent to the independent contractors who did work for your company by January 31 of the year after they provided services.
For instance, if a content provider wrote your website in 2022, the date for sending their 1099-NEC form would be January 31, 2023. You have a little extra time to mail the IRS their form copy. If you are mailing in your taxes, you have to send the 1099-NEC to them by February 28.
However, if you are filing your taxes electronically, the forms should only be sent by March 31.
You’ll generate at least three copies of the form:
Copy A goes to the IRS. If your state has income tax, you will also need to send Copy 1 to the appropriate state tax department.
Important to Note
If you are creating these forms online, you won’t be able to download a 1099-NEC template from just anywhere.
That’s because Copy A must be printed in a special type of red ink that can be scanned. It’s important to make sure that you use proper tax form preparation tools, like Form Pros.
Our tools allow you to find and create the IRS form you need correctly and accurately.
Not only does our platform give you access to Forms 1099-NEC and 1099-MISC, but you can also create Form W-2 and Form W-4 more efficiently than ever before.
Copy B goes to the independent contractor or attorney, and you may also need to send them Copy 2 so that they can file it along with their other state income tax materials.
Copy C is for your records.
If you fail to file the forms on time, the IRS may issue a monetary penalty against your business. This can range from $50 to $550 per late return.
Where Do I Get a Form 1099-NEC?
You can obtain an official Form 1099-NEC in the following ways:.
- Directly from the IRS.
- From a business accounting program.
- From your company’s accounts or financial person that prepares the taxes.
- Using a legally-binding online tax preparation software.
What Should I Include in This Form?
The 1099-NEC Form is pretty simple to fill out. It generally includes the following information:
- Your name, address, and taxpayer ID number.
- The name, address, and taxpayer ID number of the company or individual who issued the form.
- The amount of income paid to you in the appropriate box during the year, based on the type of income you received.
- The amount of federal or state income tax withheld on that income, if any.
What Are the Most Common Mistakes to Avoid?
Unfortunately, there are several mistakes to avoid that contractors sometimes make with 1099 Forms.
- Misunderstanding the different Form 1099 altogether.
- Not writing off all business expenses.
- Not keeping appropriate records.
- Filing important information—like federal income tax withheld—in the wrong place.
- Counting expenses more than once.
- Not reporting all income.
- Not filing on time.
Remember, you may also be susceptible to the same monetary penalty if the information on your forms is incorrect.
Do I Need to Use a Lawyer, Accountant, or Notary to Help Me?
You may think you need one, but hiring a lawyer, accountant, or notary is not necessary to help you create the 1099-NEC Form. You can easily do it online with a user-friendly tool like Form Pros.
Doing it this way can save you lots of money, especially if you need to create multiple copies of the form. It also helps you avoid common mistakes and file an accurately-completed document at the end of the tax year.
Create Error-Free 1099-NEC Forms Every Single Time, with Form Pros
You’ve probably hired your share of self-employed individuals. And if you’re being honest, you may have been tempted to avoid documenting that pay—even if you claim it as a deduction on your business taxes.
We understand the temptation. Knowing when and how to report the income you paid to an independent contractor can be tricky. But to protect your business in the event of an IRS audit, it’s essential to generate timely and accurate 1099-NEC forms every year.
It doesn’t have to be a difficult chore. Using an online fillable form allows you to download information instantly and generate professional PDF forms in just a few minutes.
Why use our Form 1099 NEC generator?
The easiest way to correctly complete and verify the Form 1099-NEC is to use special services like Form Pros.
It does not require additional software installation, and it saves you time and money.