How to fill out a 1099-NEC form: Step-by-step instructions and tips

What is a 1099-NEC form?

The 1099-NEC is a tax form used to report non-employee compensation. In simpler terms, it's how businesses report payments to independent contractors, freelancers, or other self-employed individuals who work for them but aren't on their regular payroll.

The IRS uses the 1099-NEC to track income earned by independent contractors. This ensures that everyone, including freelancers and other self-employed individuals, pays taxes on the money they make.

Who gets a 1099-NEC form?

Individuals or independent contractors who earn $600 or more in nonemployment income within a calendar year must receive a Form 1099. The IRS considers someone an independent contractor if they are self-employed or if a business contracts them to perform work as a nonemployee. 

The IRS provides guidelines to determine if a particular worker is an independent contractor or an employee—an important distinction because companies don’t have to withhold income taxes or FICA taxes (Medicare and Social Security) from an independent contractor’s payments.

To make the determination, business owners should consider the following three criteria, which address the degree of control they have over the worker:

• Behavioral control: Does your small business have a right to control what the worker does and how they perform their job?
• Financial control: Does your business have a say in the material aspects of a worker’s job? In other words, do you decide which expenses get reimbursed or who provides the necessary tools and supplies?
• Contractual relationship: Is there a written contract? Are benefits such as pension, insurance, or vacation days a part of that contractual obligation?

Filers who work as independent contractors may request tax withholdings, but not all 1099 forms require this process.

A step by step on how to file a 1099-NEC

When should you file your 1099-NEC form?

The 1099-NEC has a firm deadline, and missing it can mean penalties for your business. 

You need to file your 1099-NEC forms with the IRS and send them to your independent contractors by January 31st each year.

That means both you and your contractors should have the forms by the end of January. This allows contractors time to file their own taxes, and it keeps you in good standing with the IRS.

Filling out a 1099-NEC form: Step-by-step instructions

Once you’ve determined who your independent contractors are and you feel confident your books are in order, you can begin completing a 1099-NEC. We’ll walk you through this step by step so you can ensure proper taxation.

A step by step guide on how to create and file 1099 forms with QuickBooks

Step 1: Prepare your documents

Before you start filling out the form, gather all the necessary information. This will make the process much smoother and help you avoid errors.

Here's what you'll need:

Your business information: This includes your legal business name, address, and Employer Identification Number (EIN).

Independent contractor information: You'll need each contractor's legal name, address, and Taxpayer Identification Number (TIN). This is usually their Social Security Number (SSN) but could also be an EIN if they operate as a business.

Payment records: Have a record of all payments made to each independent contractor during the tax year. This could include invoices, payment receipts, or reports from your accounting software.

Having these documents ready will ensure you can accurately complete the 1099-NEC and avoid any delays in filing.

Step 2: Fill out a 1099 form

With the necessary documents assembled, you can now proceed to complete the 1099-NEC form. 

Remember that the form has different copies for various purposes: one for the IRS, one for your state (if required), and one for the independent contractor.

Now, let's move on to completing the form itself. 

Here's a breakdown of the information required for each box:

• Payer's name and address: In the top left corner, enter your business's legal name exactly as it appears on your tax records. Then, enter your business's full street address, city, state, and ZIP code.
• Payer's TIN: Enter your business's taxpayer identification number (TIN). This is your employer identification number (EIN).
• Recipient's TIN: Enter the independent contractor's TIN. This is usually their Social Security number (SSN), but it may be an EIN if they operate as a business.
• Recipient's name: Enter the independent contractor's full legal name exactly as it appears on their tax records.
• Recipient's address: Enter the independent contractor's full street address, city, state, and ZIP code.
• Box 1: Nonemployee compensation: Enter the total amount you paid to the independent contractor during the tax year. This should include all compensation for services rendered but not reimbursements for expenses.
• Box 2: Direct sales: This box is for reporting direct sales of consumer products to the independent contractor for resale. If you sold $5,000 or more of consumer products to the contractor for resale, you'll need to mark an "X" in this box. This is not common for most businesses.
• Box 4: Federal income tax withheld: Enter the amount of any federal income tax withheld from the contractor's payments. This may include taxes withheld due to a backup withholding notice from the IRS or at the independent contractor's request.
• State information: If your state requires 1099-NEC filing, complete the relevant sections. This usually includes your state tax identification number, any state income tax withheld from the contractor's payments, and the total amount of income earned in the state.

Consider using accounting software like QuickBooks to simplify the process of filling out 1099-NECs.

QuickBooks offers 1099 e-filing services with QuickBooks Payroll and QuickBooks Contractor Payments. When you use QuickBooks Payroll software or Contractor Payments, Your 1099-NECs will be automatically generated and e-filed for you, saving time and helping you prepare for tax season. 

Step 3: Submit the 1099 form

When you produce a 1099-NEC, you provide copies of the form to different recipients:

• Submit Copy A to the IRS with Form 1096, which reports all 1099 forms issued to contractors and the total dollar amount of payments.
• Send Copy 1 to your state’s Department of Revenue.
• Provide Copy B to the recipient (the contractor).
• Keep Copy C for your records; this documents the wage expense you post on your business tax return.

It’s also important to check state requirements. Certain states require businesses to file 1099 forms with them, so check with your CPA if you’re unsure.

How to file a 1099 form online

The easiest way to file a 1099 form is electronically, and you can do so using the IRS Filing a Return Electronically (FIRE) system. Before doing so, you need to request a Transmitter Control Code (TCC) and submit it at least 30 days before the tax deadline for your 1099. You can request this by filling out a Form 4419.

From there, the IRS will alert you with your TCC, and you can proceed with your FIRE account.

How contractors use Form 1099-NEC

Most freelancers and independent contractors use Schedule C, Profit or Loss From Business, to report self-employment income on their personal tax returns. 

• Part 1 of Schedule C reports income earned by the contractor. The total amount earned on all 1099 forms is posted to line 1, gross receipts or sales.
• The subcontractor’s net profit or loss on Schedule C is posted to Form 1040, Schedule 1, as additional income.
• The total adjustments to income on Schedule 1 are posted as income on Form 1040, line 10a.

If any federal income taxes were withheld on Form 1099, that total is also reported on Form 1040.

Find peace of mind come tax time

Preparing and filing 1099 forms can be tedious and time-consuming. While it may seem straightforward, the process can quickly become a headache if you employ several contractors.

Use this guide on how to fill out a 1099 form for the process, but if you get overwhelmed, look for help elsewhere. A payroll software solution for your small business can help automate the process and save you some time and frustration. Hiring an accountant or tax preparer can also help you manage the process.

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