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New 1099-NEC guide

By Cathie Ericson

You’re probably very familiar with your revenue, cost of goods sold, and profit numbers. But what about all things tax-related? When do you need to issue a 1099-NEC vs. a 1099-MISC? If you’re wondering where to get 1099s or just want to learn more about them, you’ve come to the right place.

What is a 1099?

A 1099 tax form is specifically designed for independent contractors. Last year the Internal Revenue Service (IRS) reintroduced Form 1099-NEC, which is intended to replace the nonemployee compensation part of Form 1099-MISC. The 1099-MISC is sticking around for other things, like reporting gross proceeds to an attorney, Section 409A deferrals, and nonqualified deferred compensation income. But nonemployee compensation—money paid to freelancers, independent contractors, gig workers—will now be reported on Form 1099-NEC. If you only have salaried employees (you never use contractors), stop reading now. Your employees will receive a Form W-2.

How do I know who needs a 1099 form?

If you paid any part-time workers or freelancers more than $600 during 2020, you’ll need to send them a 1099-NEC. The form serves 2 purposes—it allows you to report wage information to the IRS and enables your contractor to do their taxes.

A 1099 is commonly used for non-employee wages, however it serves other purposes. You should fill out a 1099-NEC to record payments of more than $600 for any non-employee compensation. What qualifies as non-employee compensation? Here’s a list of payment types:

Fees
Commissions
Prizes
Awards
Other forms of compensation for services

You must typically report a payment as non-employee compensation if all of the following conditions apply:

You made the payment to an individual who is not your employee.
The payment was for services in the course of your trade or business.
You made the payment to an individual, a partnership, an estate, or a corporation.
Payments to the payee were at least $600 during the year.

If you need to record payments of more than $600 for rent, prizes, attorney fees, or medical and healthcare payments, you should fill out a Form 1099-MISC. You’ll also need a 1099-MISC for things like crop insurance proceeds, cash payments for fish (or other aquatic life) from anyone engaged in the fishing trade or business, or fishing boat proceeds. There’s 1 more scenario. Use a 1099-MISC if you paid at least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest; and if you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.

Where can I get 1099 forms?

If you’re filing electronically, use the online form. You can easily E-file your 1099s with QuickBooks. If you use our paid one-time service or sign up for a monthly payroll subscription, we will auto-populate the correct forms and file them with the IRS for you. If you plan on mailing in a 1099, you must order a hard copy. They cannot be downloaded on the IRS website. You can also order printed 1099s directly from QuickBooks or buy them at an office supply store. Before preparing a 1099, collect W-9 forms (the equivalent to Form W-4 for employees). It contains all the contractor’s identifying information, including their tax ID number.

How do I file a 1099 form?

If you’re filing a 1099 with QuickBooks, the right 1099 form will be selected for you. A 1099 includes any wages you paid in the previous calendar year and must be submitted to the payee by January 31 (if January 31 lands on a weekend, then the deadline is the next business day). To avoid penalty, you must E-file a 1099-NEC to the IRS by February 1, 2021. If you’re e-filing a 1099-MISC, you’ll have until March 31, 2021.

Here’s a breakdown:

Submit Copy A to the IRS and Copy 1 to your state tax department
Send Copy B and Copy 2 to the payee, who will use them for filing federal and state tax returns
Keep Copy C for your records

Submitting a 1099 to the IRS online via the Filing Information Returns Electronically (FIRE) system is the easiest and fastest route. To get approval to use FIRE, you’ll need to file IRS Form 4419 (your application to file electronically) at least 30 days before the due date of the 1099s. Read the requirements for filing with the FIRE system for more information. QuickBooks can also help you easily E-file your 1099 forms. You can also mail in your 1099s, but if you choose this option, you must submit a transmittal Form 1096, which you’ll use to summarize all the tax forms you’re submitting for each category. Note: 1096s are not required if you E-file.

What if I need to file a 1099 correction?

Mistakes happen. That’s why the IRS offers a 1099 correction process that’s actually pretty simple. If you filed via paper, make the 1099 correction on a new form and check the Corrected box at the top of the form. If you filed electronically, make corrections on a paper 1099 (this will trigger Form 1096 described above). For more specific directions, consult your tax preparer or call the IRS at 800-829-3676.

Filing taxes doesn’t have to be hard. QuickBooks makes it easy to manage your payroll and other accounting procedures, including filing 1099s. See how QuickBooks can help you get taxes done before deadline day.

Frequently asked questions

How much does the 1099 E-File Service cost?

What are the key 1099 deadlines?

How do I know which form I need to file?

How do I get copies to my contractors?

How is my copy sent to the IRS?

If I already use QuickBooks can I bring over my data?

Can accountants file for multiple clients?

Which 1099 forms are supported?

What about state forms?

What about IRS Form 1096?

Do I need to buy those special pre-printed forms with the red ink?

How to fill out a 1099

Small business owners issue 2 different tax forms to individuals—Form W-2 for an employee or a 1099 for an independent contractor. Most 1099 boxes are self explanatory. However, some mention confusing things like fishing boat proceeds and golden parachute payments. Here’s a breakdown of boxes for both 1099-NEC and 1099-MISC forms:

1099-NEC

Box 1—Nonemployee compensation: Enter nonemployee compensation (NEC) of $600 or more. Include fees, commissions, prizes and awards for services performed as a nonemployee, other forms of compensation for services performed for your trade or business by an individual who is not your employee, and fish purchases for cash. Include oil and gas payments for a working interest, whether or not services are performed. Also include expenses incurred for the use of 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, must report the payments in this box. See Rev. Rul. 2003-66. For more specific information on what qualifies, please see page 10 and 11 of the Instructions for Forms 1099-MISC and 1099-NEC

Box 2—If checked, consumer products totaling $5,000 or more were sold to you for resale, on a buy-sell, a deposit-commission, or other basis. Generally, report any income from your sale of these products on Schedule C (Form 1040).

Box 3—Reserved for future use.

Box 4: Federal tax withheld on non-employee compensation: Enter backup withholding. For example, persons who have not furnished their TINs to you are subject to withholding on payments required to be reported in box 1. For more information on backup withholding, including the rate, see part N in the 2020 General Instructions for Certain Information Returns.

Boxes 5–7—State income tax withheld reporting boxes.

1099-MISC

Box 1—Rents: The total amount of rent you paid for your business space to an individual goes here. You can also enter amounts for other things (like equipment rentals) as long as they’re paid to an individual.

Box 2—Royalties: The total amount you paid someone for property rights goes here. This could include physical (mining, oil, or gas) or intellectual (patent or copyright) property rights.

Box 3—Other income: If you provided a $600 or higher taxable payment to someone and it doesn’t fit in any of the other boxes, it goes here. Need more details? Publication 525 gets right into the nitty gritty of what qualifies as other income.

Box 4—Federal Income Tax withheld: Any taxes that you withheld from the amount entered in Box 3 goes here.

Box 5—Fishing boat proceeds: This field likely doesn’t apply to you. But on the off chance that you’re the owner of a fishing boat and you’re issuing this 1099 to a member of your crew, you’re in the right place! Enter the amount paid here.

Box 6—Medical and healthcare payments: Did your business make a payment of $600 or more to an individual who provided medical or healthcare services this year? Report that amount here.

Box 7—Payer made direct sales of $5,000 or more of consumer products to a buyer (recipient) for resale: This field is fairly self-explanatory. Check this box if you sold products directly to someone so they could sell them to other people.

Box 8—Substitute payments in lieu of dividends or interest: Most small business owners won’t use this one, but if you paid someone a sum of at least $10 instead of dividends, or if you’re paying someone tax-exempt interest as a result of borrowing their securities, that amount goes here.

Box 9—Crop insurance proceeds: Are you an insurance company issuing this 1099 to a farmer due to crop insurance payments? We didn’t think so. Most of us never have a reason to fill in Box 9.

Box 10—Gross proceeds paid to an attorney: If you’re issuing a 1099 to an attorney for legal services in an amount greater than $600, enter that amount here.

Box 11—Fish purchased for resale.

Box 12—Section 409A deferrals: Don’t worry about entering anything in this box. If you’re a tax nerd, or you’re just curious, read Internal Revenue Bulletin 2008-52.

Box 13—Excess golden parachute payments: You can probably skip this one, too. You only enter an amount in Box 13 if you paid a disqualified person like a shareholder or highly paid person at least 3 times their typical amount.

Box 14—Nonqualified deferred compensation: Report any payments made to an independent contractor or other non-employee here. Not sure if a payment qualifies? The IRS provides these 4 guidelines for determining if Box 14 is the right place to enter it:

You made the payment to someone who is not your employee
You made the payment for services in the course of your trade or business(including government agencies and nonprofit organizations)
You made the payment to an individual, partnership, estate, or a corporation
You made payments of at least $600 to the payee during the year

Box 15—State tax withheld: Record any state tax you withheld from your payment to this contractor.

Box 16—State/Payer’s state no: Enter the state’s abbreviated name and your state identification number.

Box 17—State income: Enter the amount of the state payment.

Here’s a list of all 1099s:

There are several different kinds of 1099s that you might receive as an individual and several others that you may issue as a small business owner. Here’s a quick rundown of the most common types of 1099s you’ll encounter, and when they’re used:

1099-NEC: Your small business will usually use this form. It’s issued to your contractors or other non-employees.

1099-MISC: This form is used for contractors or other non-employees and if you also paid for rent, legal fees, etc.

1099-DIV: If you own stock and you receive over $10 in payments, you’ll need to file a 1099-DIV.

1099-INT: You’ll receive this if a financial institution has paid you more than $10 in interest in a calendar year.

1099-C: If you forgive a debt of over $600 you’re required to file a 1099-C. Likewise, if you have a debt of over $600 forgiven by someone else, you are required to include it on your tax return as income and pay taxes on it.

1099-K: Your business will receive a 1099-K from debit or credit-card providers if the total amount of gross payments for the provider adds up to over $20,000

1099-R: When you receive payments from a retirement plan, pension, annuity, or IRA you’ll receive a 1099-R.

1099-S: This form is used to record real estate transactions. If you sold property for less than $250,000 and it’s a primary residence, you don’t need to file a 1099-S. If you sold property for over $250,000, or for a property that will not function as a primary residence, you need to file this form as part of your individual taxes. If you use a lawyer to complete the sale (most people do) they’ll likely file the paperwork for you.

1099-SA: If you received payments from a healthcare spending account or medical spending account you’ll receive a 1099-SA.SSA-1099: If you received Social Security benefits during the past calendar year, you’ll receive a SSA-1099.

Think of 1099 forms as a way to keep track of any significant sum of money ($600 is often the magic number) paid to or received by an individual who is not employed by the payer. Now that you know 1099s inside and out, tax season just got a little easier. When you’re ready, order printed 1099 forms and other tax forms.

Tips to avoid mistakes

If you earned income as an independent contractor, sole proprietor, sole owner of a limited liability company (LLC), or a self-employed person, you’ll receive a 1099. If you’re a small business owner who runs LLCs, partnerships, or corporations, and you employ freelancers or part-time workers, you’ll need to file 1099s on behalf of your contractors.

If you’re self-employed, certain filing requirements arise during tax time. You pay self-employment tax (SE tax) as well as federal income tax and state tax (if applicable). SE tax is a Social Security and Medicare tax for individuals who work for themselves. If you work for an employer, your company pays half the Social Security and Medicare taxes (7.65%) and you pay the other 7.65%, which your company will withhold from your paycheck. Because you don’t work for an employer, you are responsible for the total tax amount. You pay the full 15.3% tax and deduct 7.65% of that tax as a business expense.

If you’re self-employed, you’re responsible for tracking your own income instead of having your income tracked through an employer’s payroll software. As a result, you could make unintentional errors on your taxes. If you want to keep more of your hard-earned money, take a close look at these 7 common mistakes people make on 1099s. Also check out 4 tax tips to help you avoid an audit.

1. Misunderstanding a 1099 form

There are a number of different 1099s, and each has specific tax-reporting requirements. You might receive Form 1099-R for distributions from pensions, annuities, retirement, profit-sharing plans, IRAs, or insurance contracts. Or you might receive Form 1099-S if you received sales proceeds from a real estate transaction.

If you’re self-employed (full-time or part-time) and earned an income but you don’t receive a paper form (maybe because it was lost in the mail or your address is listed incorrectly) you still have to self-report the income on your taxes. Not reporting the income may trigger an audit, which could result in paying back taxes, plus interest and penalties.

If you earned $400 or more from self-employment, you have to file an income tax return. If you earned less than $400,you might still have to file an income tax return if you made more income from another source. With the flexibility of contract work comes added responsibility. If you’re a newcomer to the world of contract work, make sure you educate yourself.

1040 vs. 1099

People often confuse forms 1040 and 1099. Here are the differences between the 2:

1040: An individual income tax form used for employees and independent contractors alike. You’re required to complete and submit a 1040 every year by tax deadline.
1099: An individual income tax form you’ll receive if you’ve been paid as a self- employed individual (contract-to-hire, independent contractor, or consultant). You should receive a 1099 from any client who paid you $600 or more for your work during the tax year. Even if you didn’t make over $600 in self-employment income and you didn’t receive a 1099, you should still report your self- employment income. Businesses are required to send out 1099s on or before January 31 of each year for the prior calendar year. If you expect to receive a 1099 and don’t receive it by February 15, contact the Internal Revenue Service (IRS) at (800) 829-4933. You might be able to use a substitute form to file your return or file your taxes online.

2. Not writing off all business expenses

One of the perks to being a self-employed contractor is a bit more leniency in what qualifies as a business expense. For example, a company might pay an independent contractor or an employee for similar work, but as an employee, you typically don’t get to write off your commuting costs. But if you’re self-employed and you primarily work from your home office, whenever you drive to and from a client’s office you can write off the mileage as a business expense.

You can take the business portion of your actual car expenses—like gas, insurance, registration, repairs, and maintenance—or any public transit expenses if you use local transportation. You can also depreciate most business equipment that has a useful life of more than 1 year and that you use in your business for more than 1 year. This may include computers, furniture, and machinery. You can take a depreciation expense using Form 4562.

As a self-employed contractor, taking all of your business expenses is the easiest way to keep more of your hard earned cash. Not doing so means you’re overpaying hundreds or even thousands of dollars every tax season.

3. Writing off personal expenses

It’s generally understood that you can’t deduct expenses that are clearly personal. But what are considered personal expenses and business expenses isn’t always clear.

For example, if you use your phone for both personal and business use, you can’t write off the entire bill. Instead, you need to prove predominant business use, meaning your phone must be used more than 50% of the time for business purposes. Your computer and vehicle fall under the same constraints, meaning you can only deduct the portion that is used exclusively for business. So, think twice before writing off the entire cost of your computer unless it’s used solely for work.

Writing off partial-personal expenses will require some leg work and good record keeping on your part so you don’t raise any red flags with the IRS. Only take a deduction on your taxes for the portion of personal items that are used exclusively for your business. The IRS allows you some wiggle room here, so just make sure you have a compelling reason for writing off 80% of that phone bill.

4. Writing off mileage and car expenses

If you’re self-employed, there may be times when you have to use your car for business.Mileage is probably the biggest deduction, but a percentage of the wear and tear on your vehicle from business use can also be deducted in 1 of 2 ways:

1. Actual vehicle expenses method: Add up all of your vehicle operating expenses, such as interest on your loan (or cost to lease a vehicle), insurance, gas, repairs, maintenance, and so on. Divide any miles you drive solely for business by the total miles driven. That percentage becomes your allowable deduction.

2. Simplified method: Apply the current IRS-mandated mileage rate to the total miles driven for business in the year. For tax year 2019, the standard mileage deduction is 58 cents per mile for business use (up from 54.5 cents in 2018).

Whichever method you choose, you must keep track of all mileage used for business in a vehicle log. Jot down miles, dates, and descriptions in a notebook, or use software like QuickBooks Self-Employed to ensure you avoid errors.

5. Not keeping adequate or accurate records

You must keep adequate records. The IRS requires you to keep track of all business receipts as proof that you actually incurred each of the expenses. Yes, it takes a little time and organization on your part, but it’s worth the effort in the long run. One of the main reasons mistakes are made is a lack of organization. Those mistakes can lead to additional tax payments and penalty fees.

6. Paying quarterly taxes

For the self-employed, federal income taxes are generally paid on a quarterly basis by a specified due date. If you’re not having taxes withheld by an employer, the burden is on you to pay estimated taxes 4 times a year at the end of each fiscal quarter. The due dates for calendar year 2021 are April 15 (1st quarter), June 15 (2nd quarter) , September 15 (3rd quarter) , and January 15, 2022 (4th quarter).

If you expect to owe less than $1,000 in taxes for the year after subtracting federal income tax, you are exempt from quarterly tax payments. Also, if you have federal tax withholdings (perhaps because you also have Form W-2 income or because one of the companies you contract with takes withholdings) you may be exempt from filing quarterly taxes as long as those federal tax withholdings equal 90% or more of what you’ll owe for the year. However, you are responsible for making quarterly payments if you expect to owe tax of $1,000 or more when you file your return.

7. Penalties for late or non-payment

No one likes to pay taxes. But keep in mind, the IRS can penalize you if you don’t file quarterly taxes. You won’t have to pay the penalty if you can show reasonable cause for the failure to pay on time. Ten days after the IRS issues a final notice of intent to levy or seize property, the 0.5% rate increases to 1% per month. The penalty rate is 0.25% for each month or part of a month in which an installment agreement is in effect. If payments are more than 60 days late, the IRS will assess a $100 penalty. Penalties can also be applied for underpayment of estimated taxes. Fortunately, QuickBooks Self-Employed can manage your deductions and calculate quarterly tax payments.

How to avoid an auditMistakes can lead to steep fines and an IRS audit. Even if you try to avoid common mistakes, you could still trigger an audit. The truth is, the IRS uses your taxpayer identification number and mathematical formulas to select individuals from all groups, which means everyone has a chance of being selected for an audit. It’s the IRS’s way of keeping people honest.

Everyone qualifies for an audit regardless of their earnings. Think of it this way—if the IRS only looked at people who made more than $5,000 in net earnings, then some taxpayers might change their books to look like they made less than $5,000. There are a few steps you can take to lessen your chances of an audit. Here are 4 tips to keep your taxes on the up-and-up and the IRS off your back.

1. Ensure your reported income matches your tax documents

As an employee, you receive a Form W-2 at the end of the year, but as a contractor, you receive a 1099 form. Both forms summarize income you’ve earned, and copies are sent to the IRS so they also know how much you made during the year. These forms are tied to your Social Security number, so their system will automatically pick up any inconsistencies, increasing your risk of an audit.

If the form you receive doesn’t match the amount you were paid out, take these steps:

1. Make sure you didn’t make a mistake. For example, a 1099-K might include commissions and fees in your gross payout. You can deduct these as a business expense, so your taxable income and tax brackets aren’t affected by the fees.

2. Contact the company who hired you as a self-employed contractor to request a reissue. Make sure they are paying you non-employee compensation. Sometimes company’s make mistakes, so it’s best to contact the company as soon as possible to sort out the issue.

2. Carefully document any commonly audited expenses

The IRS will audit some income and expenses more than others—either because people commonly abuse the system or commonly make mistakes. For self-employed contractors, here are a few common areas that sound the alarm:

Car expenses: Make sure all mileage you deduct is for business purposes only and has been properly documented in a logbook or a mileage tracker.
Home office expenses: The portion of your home you specify as a home office must be your primary place of business and used regularly and exclusively for work. The home office expense deduction is closely reviewed by the IRS.
Meal expenses: Make sure the meals were either with a client and had a business purpose, or were incurred while traveling overnight on a business trip.

3. Don’t claim that a hobby is actually a business

If you sustain a business loss for 3 out of 5 consecutive years, the IRS might claim you’re pursuing a hobby instead of running a business. You’ll need to prove that you intended on making a profit and explain why you didn’t. If the IRS decides your business is a hobby, they might disallow any business expenses you have previously written off, meaning you could be on the hook for back taxes and penalties.4. Don’t call attention to your incomeThe IRS commonly compares your income to others in similar situations. Your chances of getting audited increase if you only claim $5,000 in income but live in a wealthy zip code or if you made a lot of money last year and no money this year.

Take everything into account

Use these 7 tips to understand the ins-and-outs of a 1099 and prepare for tax time. Keep your expenses and receipts organized so you can claim the maximum amount of deductions you’re eligible for as a self-employed worker. In addition, pay your quarterly taxes correctly and on time, and steer clear of common tax mistakes.