What is a 1099 NEC? - The Full Guide
It is common within small businesses to hire independent contractors or freelancers to help them with the individual or one-off services that they need. These workers do not technically count as the businesses employees and so in order to pay non-employees, they must fill in a 1099-NEC form so that their income is still reported for federal tax reasons. This form must be filed through the IRS (Internal Revenue Service).
Recently, the IRS reintroduced this form so that self-employed individuals can report their income this way rather than filling out a 1099-MISC form which people had to do prior to 2020. This was a much needed update due to the fact that originally the two forms had two different dates by which one needed to have filled it out by.
The 1099-NEC form is part of the family of other 1099 tax forms such as the 1099-MISC filled out to report miscellaneous income, the 1099-INT used to report interest income, and the 1099-DIV used to report distribution and dividend income.
Today, we’re going to look in detail at what a 1099-NEC form is, when to send it off and what an individual's responsibility is when it comes to filing the form.
The 1099-NEC form can be filled out to inform the IRS of non-employee payments of over $600 for the tax year.
Independent contractors, freelancers, small businesses, and other professionals who provide one off services count as non-employees.
You must only report payment for services that were completed for a business or trade.
Before 2020, the compensation for non-employees used to be reported through the 1099-MISC form.
The 1099-NEC form is part of the family of 1099 forms. These include the 1099-MISC, 1099-INT, and 1099-DIV forms.
Why was the 1099 NEC Reintroduced?
Prior to the 2020 tax year, the 1099-NEC was last used in 1982 and businesses would need to fill out the 1099-MISC form to inform the IRS about any compensation for non-employees. In the 1099-MISC form would be used to report non-employee earnings of over $600. Usually, the payments made would represent the non-employee compensation and this information would go into box 7 of the 1099-MISC form.
However, the separate forms had different filing deadlines and requirements and would often confuse employers. So, to make matters simpler, the IRS decided it was best to reintroduce their 1099-NEC form as a single form with a single deadline that all payments needed to be reported through.
What to Know About the Updated 1099 NEC Form
Individuals who are self employed should no longer find personal payments that were sent to them over the course of the year on this form. Now, the form should only reflect those payments that were made as business or trade related compensation.
The compensation that is reported for non-employees found in Box 1 of the 1099-NEC form is usually reflecting the income from self-employment and in most cases will need to be taxed. Any payments that do not need to be reported through the 1099-NEC form would usually have been filed through the 1099-MISC form.
For those who are confused about what payments to include in Box 1 of the 1099-NEC form, the IRS has provided a detailed list of the kinds of payments.
Some example are:
Any monies distributed to non-employee salespersons that would need to be repaid outside of the current year.
Any service fees paid to professionals such as attorney fees (corporations included), architects, contractors, accountants, and so on.
Any monies paid between professionals. For example, referral fees or fee-splitting.
Any monies distributed to witnesses by attorneys or other legal experts.
Monies paid for services that include paying for materials or parts that were required to perform a service.
Who Can File A 1099 NEC Form?
Any business in trade who pays at least one non-employee for their services that add up to $600 or more or who withholds federal income tax from their payments, must now use the updated and reintroduced 1099-NEC form in order to report these withholdings and payments.
Simply speaking, if you meet all four of these requirements then you must file a 1099-NEC form.
Money has been distributed to a non-employee.
Money has been distributed to pay for a service that benefits your business or trade.
Money has been distributed to a partnership, estate, individual, or corporation.
The total distributed payment totaled to $600 or more for the tax year.
It is important to note that you should not file a 1099-NEC form for any payments that have been made to a corporation. This includes a LLC (Limited Liability Company).
If you have withheld federal income tax due to backup withholding for any sum of money (even anything under $600), then you are required to file a 1099-NEC form.
The 1099-NEC form must also be filed if you have made any sales of products or services that total to $5,000 or more. This included buy-sell, resale, deposit commission, or any other reasoning. You must report this information on a recipient’s tax return for their small business.
Please note that you should not file a 1099-NEC form for any payments that are personal. These forms must only be completed by a business or trade that is making a profit from these payments.
Also read: Here’s How to Change Your W2 Wage
Form Due Date
The 1099-NEC form should be completed by each payee and subsequently filed directly with the IRS by 31st January post tax year. For example, the 1099-NEC form in 2021 would need to be filed before 31st January, 2022. If this date happens to land on a bank holiday or weekend, then the form must be filed by the next business day.
Typically, there wouldn’t be any withholding taken from non-employee payments. However, there is an exception when it comes to backup withholding. This is typically asked for by the IRS if the incorrect taxpayer ID is provided by the taxpayer for the W-9 form.
If this is the case, then the IRS will send a backup withholding form to the person who is paying that will mean they have to withhold 24% their federal income taxes from any non-employee payees. Until the IRS removes it, the withholding order will stay in effect.
Where to Get A 1099 NEC Form
There are multiple ways to acquire a 1099-NEC form. These include:
From preparation software for your business tax
Directly from the internal revenue service (IRS)
From the accounting program for your business
From any CPA or accountant that organizes business tax
Unfortunately, you are unable to download the 1099-NEC form from the internet due to the fact that the copy is printed using a certain type of red ink that is readable when scanned in correctly.
What Should You Do If You Don’t Receive a 1099 NEC Form?
If you received an amount of over $600 from a payee due to your non-employer status then you are required to fill out and file a 1099-NEC form as a part of your tax return through the IRS. If the payee has not sent you the 1099-NEC form by the due date at the end of January then you must contact them directly to request it.
Also read: Getting A Copy Of A Prior Year W2 Form
What is the Payer’s Responsibility?
It is important to understand what the payer’s responsibilities are when it comes to filling out their 1099-NEC forms. In short, there are four main things that the payers must do when filing the 1099-NEC forms.
After the calendar year is over, they must complete the 1099-NEC form as well as any necessary 1096 forms. 1096 forms basically act as a cover letter for all 1099 forms that are filed.
The forms must then be filed through the internal revenue service as well as the state tax department if needed by the end of January. These can be filed either by mail or electronically.
They must also send a separate copy of the 1099-NEC form directly to the person/people they paid by the end of January.
Remember that these deadlines may change depending on the day of the week that January 31 falls on. If January 31 falls on a bank holiday or weekend then these forms need to be sent by the following business day.
What is the Payee’s Responsibility?
No matter how many business clients and non-employees you have compensated throughout the tax year, each of these will require a separate 1099-NEC form to be completed. This is only relevant if each of these individually have been paid $600 or more.
It is important to note that if you used a third party payment method, for example PayPal as opposed to debit or credit card, then you will not need to file a 1099-NEC form for these payments.
The person that has paid you is required to fill out a 1099-NEC form and must send you a copy directly by the end of January. If you do not receive this form as you are expecting then you must contact them directly before this due date arrives.
This form is purely for you to have information on what income you are reporting at the end of the tax year. You are not required to send it to the internal revenue service. However, you must report all of your income no matter if you have been sent a 1099-NEC form or not.
For example, say we have a freelance photographer who over the course of the tax year managed to work a total of three months for a magazine followed by four months as a commissioned wedding photographer. These businesses will need to report the money that they paid him through the 1099-NEC forms. These forms will then need to be sent to the photographer and also filed with the IRS by the business themselves. When the freelancer is preparing his tax return, he must also report the income that he received from the business and any other income that he may have gained over the year so that he may pay the correct amount of income tax.
Also read: The Difference Between Forms 1009 and W2?
How to Fill in A 1099 NEC Form
These forms are made up of 5 different sections that you will need to know how to fill out. These five sections are:
Information about the payer
Information about the payee
The amount that the non-employee was compensated
The amount of withheld federal income tax
Filling out the payer and payee information is simple, all you will need to do is include names, addresses, and taxpayer identification. There are several boxes that you will need to complete.
Here is the information they must consist of:
Box 1: The total amount that the non-employer was compensated during the year must be reported here.
Box 2: You must check this box if you happened to sell $5,000 or more in resale. This exact amount won’t be reported on the 1099-NEC form, but will be reported on the tax return for your small business.
Box 4: This is where you will state any withheld federal income tax that has come from a backup withholding notice.
Box 5: This will show any state tax that is withheld. Each state has an individual identification number and will be shown in Box 6.
Box 7: This will show the state income that has been made to the non-employee over the course of the year in total.
If you happen to fill out this form incorrectly then you can request a new form and complete this with the correct information and make sure to check “corrected” at the top of the form.
Don’t worry too much when it comes to filling out your 1099-NEC form. Once you become familiar with the process it becomes pretty straightforward. We hope that this has helped you understand what a 1099-NEC form is and when to file one.
When it comes to Forms 1099 and W2 it is also worth noting that employers need to understand how to fill in various tax forms and which particular documents to submit.
Having these files in order will allow their payroll to run smoother and ensure employees will receive the correct pay stubs. Also, check out our 1099 nec form generator which is another brilliant form generator which produces 1099 forms easily.