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Reporting Non-Employee Compensation – Form 1099-NEC

  • Filed in: Taxes
  • Written By : Countick Team

Table of Contents

If you operate as an independent contractor or freelancer or hire them in your firm, you must be familiar with Form 1099-NEC.

Businesses use this form to report payments made to non-employees who provided a service during the tax year, such as freelancers, independent contractors, and sole proprietors.

what is form 1099-NEC?

Form 1099-NEC is a type of information return in the 1099 series. Beginning in 2020, business owners must record payments to non-employees on Form 1099-NEC. Businesses formerly reported those payments in box 7 on Form 1099-MISC.

The 1099-NEC form does not replace Form 1099-MISC. It’s just a different way to report non-employee remuneration. Other payments, such as rent, royalties, fishing boat revenues, and payments to a solicitor for legal services, remain to be reported on Form 1099-MISC.

what is non-employee compensation?

Any amount paid to an independent contractor who performs a service for your trade or business is considered non-employee compensation. Fees, commissions, awards, prizes, and other forms of compensation may be included.

Compensation paid to a non-employee is considered differently than wages paid to an employee. When you pay an employee, you must generally deduct income and Payroll Taxes from their compensation. You issue a W-2 at the end of the year that shows the employee’s income and the taxes withheld from their paychecks.

When you hire an independent contractor, you usually don’t have to take taxes out of their pay for Social Security, Medicare, or income. The employee is accountable for paying the taxes from their earnings. Instead of a Form W-2, you provide a 1099-NEC to the employee, which reports the entire payments you paid to them during the previous year.

who is eligible to file a 1099-NEC?

You must submit a 1099 NEC for each independent contractor. If your company meets all of the following criteria

  • You paid a person, partnership, single-member LLC, or an LLC taxed as a partnership 
  • The payments made during the tax year totaled $600 or more.

Also, you must send out Form 1099-NEC if you withheld any federal income tax from non-employee compensation payments under the backup withholding rules, no matter how much you withheld.

There are a few exceptions to the requirement to file a 1099 NEC for payments to companies or LLCs taxed as corporations. The IRS Instructions for Form 1099-MISC and 1099-NEC outline these exceptions.

If you use a credit or debit card or third-party payment processors like PayPal or Stripe to pay, you don’t have to file a 1099-NEC. The financial institution or payment processor will provide a 1099-K form for reporting payments made using these methods.

suggested reading: form 1099 filing and reporting requirements

when should you file a 1099-NEC?

By January 31, you must send to the payee Copy B of Form 1099-NEC and file Copy A with the IRS. Paper copies or electronic copies might be used for filing. Copy 1 is for submitting a copy to a state tax office if necessary.

If those dates fall on a weekend or holiday, the deadline is moved to the next business day.

Note those dates on your calendar since the penalties for failing to file Form 1099-NEC might be severe. The penalty for small businesses that miss the due date ranges from $50 to $580 per form, depending on how far over the due date you issue them. The IRS restricts the penalties for significantly delinquent forms to $1,113,000.

And willfully ignoring your filing duties can cost you a lot of money. There is no maximum penalty, which is $550 per form.

Form 1099-NEC: how to fill it out

Form 1099-NEC is one of the simplest IRS forms to complete. All you need is the following information:

  • Information about your company, such as its name, street location, phone number, and taxpayer identification number
  • The payee’s identifying information, such as their name, postal address, and tax ID number. There is also a field for an account number if the payee has numerous accounts.
  • The amount paid in non-employee pay for the fiscal year
  • withholding federal income tax is usually zero unless backup withholding rules for the worker are required.
  • Any state income taxes withheld, the worker’s state identification number, and the amount of non-employee remuneration that is relevant to that state.

While you may download a PDF version of Form 1099-NEC from irs.gov, don’t just fill it out and mail it in. The IRS requires a scannable Copy A. 

Form 1096 must be included if you paper-file forms ordered directly from the IRS. Form 1096 is a cover sheet for information returns submitted to the IRS. Form 1096 is required for each type of information return you file, including Forms 1099-NEC, 1099-MISC, and others. You don’t need to attach Form 1096 if you e-file your 1099 forms.

how do I get a 1099-NEC?

If you operate as an independent contractor, freelancer, or self-employed person, you should receive a 1099-NEC from each company that paid you at least $600 during the tax year. But if you were paid with a credit or debit card or via a third-party payment processor such as PayPal, you should not have received a 1099-NEC.

By January 31 of the next tax year, the company must provide you with a copy of your 1099-NEC form. A copy will also be sent to the Federal Revenue Service (IRS). As a result, whether you record your business income and expenses on Schedule C linked to your Form 1040 or submit a separate business tax return, the IRS expects to see that remuneration reflected on your tax return.

what distinguishes 1099-NEC from 1099-MISC?

Although Form 1099-NEC is not new, it has not been utilized since the 1980s. Back then, the form featured only one box for businesses to disclose fees, commissions and other non-employee compensation to independent contractors. Beginning with the 1983 fiscal year, the IRS transferred such information to Form 1099-MISC, which records numerous miscellaneous income sources.

That worked well until the 2015 Protecting Americans from Tax Hikes (PATH) Act. The PATH Act shifted the deadlines for businesses to submit 1099-MISC copies to the IRS.

Until then, the deadline for submitting Form 1099-MISC to the IRS was February 28 (March 31 if filing electronically). The PATH Act, however, moved the due date to January 31 if the form includes non-employee income in box 7, regardless of whether the business sent out its 1099 forms on paper or electronically. If non-employee compensation was not included in Box 7, the company had until February 28 to submit paper forms or April 1 to file electronically.

Not surprisingly, having numerous filing deadlines for the same form caused a great deal of confusion and resulted in a great deal of late filing fines.

To clear up any uncertainty, the IRS will buy back Form 1099-NEC in 2020. The new Form 1099-NEC replaces boxes 7 and 9 on the old Form 1099-MISC. Companies use it to report compensation for people who aren’t employees and direct sales to consumers of $5,000 or more. There are also options for withholding federal and state income taxes, which may be needed for taxpayers who are subject to backup withholding.

Other forms of payments, such as rents, royalties, and other miscellaneous revenue, are still reported on Form 1099-MISC. The IRS Instructions for Forms 1099-MISC and 1099-NEC contain a comprehensive list of the types of income that must be reported on both of these forms.

what else should you know about form 1099-NEC?

If you engage independent contractors or freelancers for your small business, make it a practice to request IRS Form W-9 before making any payments to them.

Form W-9 collects payments from vendors and contractors in the United States. It asks for the vendor’s or contractor’s name, address, taxpayer identification number, and business structure.

It also requests certification that they are not subject to backup withholding.

If you get a W-9 before sending payments, you won’t have to scramble during tax season to find out the payee’s full name, address, and taxpayer identification number.

You’ll have everything you need to complete your 1099 tax forms and submit them electronically or by mail at the end of the tax year.

helpful resources: cost effective accounting solutions for startups how to streamline payroll and keep finances in check

how Countick can assist

Having clear, accurate, and up-to-date books is vital when filing your taxes, whether you get a 1099-NEC or need to send one to a contractor. Your Countick bookkeeper may give you complete year-end financial statements, including a 1099-specific report, to help with tax filing.

In January, your Countick-provided 1099 report can tell you: 

  • Who do you need to file 1099 NECs for
  • How much you paid each individual, what they were paid for, and the transactions that went along with those payments.

We’ll even tell you whether you must file an NEC or MISC form with the IRS for that 1099.

We can also assist you if you prefer a more hands-off alternative! Our Premium package provides on-demand income tax advice service year-round and an all-star team to prepare and file your tax return.

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