1099-NEC form: What you need to know and when to use it

If you're a small business owner who works with freelancers, you may need to file Form 1099-NEC. Introduced in 2020, this form reports income paid to independent contractors, helping the IRS track their earnings and ensure the correct amount of taxes is collected.

In this article, we'll explore the details of Form 1099-NEC, including how it works, how to fill it out, and key differences from other 1099 forms. By understanding Form 1099-NEC, you can ensure compliance with tax regulations and maintain a smooth business operation.

How does Form 1099-NEC work?

Businesses must issue a 1099-NEC to independent contractors earning over $600 annually. If you pay an independent contractor more than $600 in a year, the IRS requires you to file a Form 1099-NEC with the IRS and provide a copy to the contractor. This applies to all types of independent contractor payments, such as those made to freelancers, consultants, and other nonemployees.

What is nonemployee compensation?

Nonemployee compensation refers to payments made to individuals classified as independent contractors or freelancers rather than employees. This includes work such as freelancing, consulting, and contract labor.

Nonemployee compensation is reportable if it meets the following criteria:

• The payment is made to an individual who isn't an employee.
•  The payment is made in the course of a trade or business.
• The total payments made to the individual in a year exceed $600.
• The recipient is an individual, partnership, or estate. 

If you pay an independent contractor more than $600 in a year for work related to your business, you generally must report this income on Form 1099-NEC.

How to fill out a 1099-NEC form

Completing Form 1099-NEC is straightforward, similar to filling out other 1099 forms. You can download an informational copy of Form 1099-NEC directly from the IRS website.

1. Gather necessary information.

To properly file Form 1099-NEC, you'll need the following information:

• The TIN of the recipient
• Your business’s TIN and information
• Payment amounts made to the independent contractor during the year 

2. Complete the 1099-NEC form

Once you have gathered the necessary information, you can begin filling out Form 1099-NEC. 

• Payer’s information: Fill in the top portion of the 1099-NEC with your business's information, including your name, address, and Employer Identification Number (EIN). Double-check this information for accuracy to avoid errors and potential penalties.
• Recipient information: Identify all independent contractors you paid more than $600 in the year. Before starting work with each contractor, collect a Form W-9. This form will provide the necessary information to fill out the recipient's portion of the 1099-NEC. 
• Boxes 1-7:  Box 1 is the primary box to complete on a 1099-NEC, reporting the total amount paid to the independent contractor during the year. If any of the other boxes (2-7) apply to your situation, refer to the IRS website for specific instructions for completing them.

3. Verify and distribute form copies

Review and distribute form copies based on the number of independent contractors you pay over $600.

There are five copies of Form 1099-NEC:

• Copy A: For the IRS 
• Copy 1: For your state tax department
• Copy B: For the recipient (the person you paid) 
• Copy 2: Also for the recipient 
• Copy C: For payer (your copy for recordkeeping) 

Filing requirements and deadlines 

To properly file Form 1099-NEC, you'll need the following information:

• The TIN of the recipient
• Your business’s TIN and information
• Payment amounts made to the independent contractor during the year

Penalties for not filing a 1099-NEC form

Missing the Form 1099-NEC filing deadline can result in fines that increase the later the form is submitted, so meeting the due date is essential to avoid penalties.

The IRS imposes varying penalties for late submissions:

• $60 per form if you file up to 30 days after the due date 
• $130 per form if over 30 days late but before Aug 2 
• $330 per form after Aug 1 or if you don’t file at all
• $660 per form for intentionally disregarding filing requirements 

To avoid these penalties, file your 1099-NEC accurately and on time. If unexpected delays occur, you can request an extension using Form 8809 for additional time.

What’s the difference between 1099-MISC and 1099-NEC?

Form 1099-MISC and Form 1099-NEC are both used to report nonemployee compensation, but they serve different purposes.

• Form 1099-MISC: Reports payments like rent or prizes that aren't subject to self-employment tax.
• Form 1099-NEC: Reports nonemployee compensation likely subject to self-employment tax. Introduced in 2020, it helps the IRS track income from independent workers more effectively.

Remember: Choose the correct form based on the type of payment you're reporting.

Find peace of mind come tax time

To streamline your tax preparation, especially when dealing with 1099-NEC income and calculating tax deductions, consider using accounting software with integrated payroll functions.

These tools can automate many tasks, saving you time and reducing the risk of errors. By automating calculations like self-employment tax and generating tax forms, you can focus on growing your business and enjoy a less stressful tax season.