What Is an IRS 1099-NEC Form?
If you own a small business or are a freelancer, you are probably familiar with IRS 1099 forms. In 2020, the IRS released a new 1099-NEC based on adjustments to the 1099-MISC form, which is now used to report miscellaneous income, such as rent or legal settlements. Small business owners who employ independent contractors must be informed on how to fill out a 1099-NEC.
Even though the employer fills out this form, if you are a freelancer, gig worker, self-employed or independent contractor, this form may be relevant and important for you to understand. If you are a business that pays these workers, you must understand and fill out the 1099-NEC form.
Who Uses a 1099-NEC Form?
The following conditions must be met to file a 1099-NEC form:
- You are a business
- You have independent contractors who are not employees
- The service provider is a pass-through legal entity (i.e., Incorporated business)
Businesses must file a 1099-NEC form for non-employee compensation–for example, independent contractor compensation, meaning that the form is required if your business uses independent contractors in addition to or as opposed to employees who would be on regular payroll. A business must submit a 1099-NEC form for each independent contractor that they paid.
The IRS defines someone as an employee if they meet the following conditions:
- The company has the right to control how the worker performs the job
- The company decides which expenses are reimbursed
- The company is contractually obligated to supply the worker with benefits such as pension and sick days.
If the worker meets the above criteria, the IRS classifies them as an employee, not an independent contractor, and as an employer you must fill out a W-2 form instead of a 1099-NEC form.
A 1099-NEC form is for business-related expenses; therefore, you may not need to fill out a form for every independent contractor that you pay.
Do not try and forego documenting payments to independent contractors. 1099-NEC forms are necessary forms required to protect your business in the event of an IRS audit.
Generally, you must report payments on a 1099-NEC form for:
- Professional services: Accountants, lawyers, graphic designers, etc.
- Payments for services, including materials used for the services
- Commission paid to non-employee salespeople
When to Use a 1099-NEC Form
If your business paid a contractor more than $600 in any tax year, you must fill out a 1099-NEC form for that contractor come tax season, unless they are a C corporation or B corporation, then you are not required to file a 1099-NEC form. As the payer, it is your responsibility to file the form, not the contractor.
Although independent contractors who receive less than $600 may still be required to pay taxes on that income, as a business, you do not have to provide this information to the IRS for them.
You must also file a 1099-NEC form for any non-employee for whom you’ve withheld federal income tax for any amount, even if you paid them under $600. This is uncommon with independent contractors as businesses usually do not withhold income taxes for contractors.
The deadline to file a 1099-NEC form is January 31 in the year following the income tax year. Be sure to file the form on time to avoid any penalties or delays. You must also have given a copy of the form to the respective independent contractor by January 31–they will need it to file their income tax.
What You Need to File a 1099-NEC Form
To complete a 1099-NEC Form, you will need the following information:
- Payer’s Information (Name, address, taxpayer ID)
- Recipient’s Information (Name, address, taxpayer ID)
- The amount paid to the recipient in the given tax year
- Federal income tax withheld, if applicable
When you fill out the 1099-NEC form, you will notice that there are three copies. Copy A goes to the IRS, Copy B goes to the independent contractor, and Copy C is for your records. You are responsible for the IRS and the contractor receiving their copies on time.
Things to Remember
- If you are a business owner, do not fill out 1099-NEC forms for your employees. There are serious penalties for misclassifying employees as contractors. You must use a W-2 form for your employees.
- Be sure to track your business expenses throughout the year and keep all appropriate payment records to make filling out the 1099-NEC form more manageable. Even if you do file a 1099-NEC form, you must keep all appropriate records as you may have to provide them during an audit, including any contractor agreements.
- If you are an independent contractor, you are not required to submit a copy of the 1099-NEC form. However, you should request a copy from your client if they haven’t sent it by the January 31st deadline, as you will need it to file your personal income tax.
- Some states require you to file a 1099-NEC form with the state. Review the required tax documents for your state before submitting them.
- Make sure to count expenses accurately and avoid counting the same expense more than once, as this may present problems in the future.
- Be sure that it is indeed a 1099-NEC form that must be filed and not another type of 1099 form.
Understanding the IRS 1099-NEC Form
A 1099-NEC form is essential if you are a business that pays non-employees. It may be tempting to overlook payments to independent contractors, but this could put you and your business in danger. As the business that paid non-employees, you are responsible for filling out the 1099-NEC form and supplying a copy to the contractor and the IRS. Make sure that you are filing the 1099-NEC form on time every year to avoid penalties or delays.
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