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What is a form 1099-nec

Saturday, December 05, 2015

What your small business needs to know

There’s a lot you have to manage as a small business owner, and you simply can’t do everything yourself. As you’re building your business, you might hire freelancers or independent contractors to help lend a hand and take some stress off of you. By hiring freelancers to help you at your business, you’ll have different tax reporting obligations to the Internal Revenue Service (IRS) than if your company hires a regular employee. So, in this article, we’ll cover Form 1099-NEC, including what it is, the filing requirements, and the difference between Form 1099-NEC and Form 1099-MISC. To start, let’s learn about Form 1099-NEC.

What is Form 1099-NEC?

Prior to 2020, if your business hired freelancers or contractors, you would send them a 1099-MISC form to report their income. However, this requirement changed starting in 2020 when the IRS decided to re-introduce Form 1099-NEC. This form was introduced due to a discrepancy in reporting deadlines. This discrepancy led to some people manipulating credit claims in order to receive the Earned Income Tax Credit (EITC).

Form 1099-NEC helps businesses report payments to any non-employees. If you’re not familiar with non-employee compensation, it includes payment made to individuals who are not on the business’s payroll on a contract basis to complete a project or assignment. Typically, there are four conditions for non-employee compensation:

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

You must also file Form 1099-NEC for anyone from whom you withheld federal income tax under backup withholding rules for any amount, even if it’s less than $600.

Therefore, if your company meets these requirements and works with independent contractors, gig workers, or other self-employed individuals, you’ll need to file a Form 1099-NEC for each person who meets the requirements. The IRS lays out a variety of types of payments that qualify as non-employee compensation, including:

  • Professional service fees, such as fees to attorneys (including corporations), accountants, architects, contractors, engineers, etc.
  • Fees paid by one professional to another, such as fee-splitting or referral fees.
  • Payments by attorneys to witnesses or experts in legal adjudication.
  • Payment for services, including payment for parts or materials used to perform the services if supplying the parts or materials was incidental to providing the service. For example, report the total insurance company payments to an auto repair shop under a repair contract showing an amount for labor and another amount for parts, if furnishing parts was incidental to repairing the auto.
  • Commissions paid to non-employee salespersons who are subject to repayment but not repaid during the calendar year.
  • A fee paid to a non-employee, including an independent contractor, or travel reimbursement for which the non-employee did not account to the payer, if the fee and reimbursement total at least $600.

However, if your company works with someone who registers as a C corporation or S corporation, you’ll not submit a 1099-NEC. To double check the contractor’s status, check their Form W-9. It’s important to note that you’ll need to send the IRS a copy of Form 1099-NEC for each individual who receives non-employee compensation.

As you would for employee Form W-2s, you’ll want to make sure to confirm the freelancer and contractor information in October or November so that you’re ready for year-end tax form processing and distribution. As you do with employees, you’ll need to verify each freelancer’s social security number, legal name, and current mailing address.

If you issue a 1099-NEC form to a contractor, they are responsible for payroll taxes and self-employment income taxes. Unlike a W-2 employee, you don’t pay payroll taxes. The contractor is responsible for those themselves. Now that you know more about the 1099-NEC, let’s compare the Form 1099-NEC with the Form 1099-MISC.

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

If you’ve been paying independent contractors for a while, chances are that you’re familiar with the Form 1099-MISC. While the Form 1099-NEC replaced the Form 1099-MISC for most instances in which your company paid a freelancer, there may be times when your business will need to file a 1099-MISC. Form 1099-MISC is the form for miscellaneous income. You’ll need to issue a Form 1099-MISC if you made any of the following payments:

At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest.

At least $600 in:

  • Rents
  • Prizes and awards
  • Other income payments
  • Medical and health care payments
  • Crop insurance proceeds
  • Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish
  • Generally, the cash paid from a notional principal contract to an individual, partnership, or estate
  • Payments to an attorney
  • Any fishing boat proceeds

As you can see, these payments are very specific. For the majority of business owners who used to utilize a 1099-MISC, you’ve probably switched to the 1099-NEC. You may wonder, “How does a small business like mine file a 1099-NEC?” Let’s look in the next section.

How to file Form 1099-NEC

When it comes to filing the correct forms, you’ll need to submit at least two copies of Form 1099-NEC for each worker who meets the filing requirements mentioned earlier. These two copies, Copy A and Copy B, should be filled out identically. Your business will submit Copy A to the IRS, while you’ll submit Copy B to the contractor.

You will need to give each payee a Form 1099-NEC and file a copy with the IRS. For Form 1099-NEC, the due date to submit to the IRS is January 31 of the year following the tax year. For example, for the 2022 tax year, your company needs to submit Form 1099-NEC to payees and to the IRS by the filing deadline of January 31, 2023. If that date falls on a weekend or holiday, the form is due the next business day.

You can obtain Form 1099-NEC from a few different sources:

  • Your company’s tax software
  • Directly from the IRS, including from the IRS website
  • Your business’s accounting software
  • An accountant or CPA who prepares business taxes

In order to complete the form, you’ll need to get some data from each payee. Usually, you’ll do this with Form W-9. This form is also known as the Request for Taxpayer Identification Number and Certification. Essentially, it contains all the pertinent information you’ll need as a business owner to correctly fill out the payee’s Form 1099-NEC, including:

  • Legal name or business name, if applicable
  • Business entity (sole proprietor, partnership, corporation)
  • Current address
  • Taxpayer identification number (SSN, TIN, or EIN)

Once you have this information, you’ll then need to fill out the form for each payee. Here’s what Form 1099-NEC contains:

  • Payer's information
  • Recipient's information
  • Non-employee compensation amount
  • Federal income tax withheld
  • State information

Information about the payer and payee information includes their name, address, and taxpayer ID.

Then, there are a number of different boxes on the form, including:

  • Box 1: Reports the total amount of non-employee compensation paid during the year.
  • Box 2: Must be checked if you sold $5,000 or more for resale or other purposes. The total amount isn't reported on this form, but it's included on your small business tax return (usually Schedule C).
  • Box 3: This box is intentionally blank.
  • Box 4: Reports any federal income tax withheld from a backup withholding notice.
  • Box 5: Shows any state tax withheld
  • Box 6: A specific identification number for each state
  • Box 7: The total state income to the non-employee for the year.

You’ll fill out each of these boxes appropriately before submitting Copy A to the IRS and Copy B to the payee. You can submit Copy A either by e-file or by mail. If you choose to file a paper copy, you’ll need to also include Form 1096 as a cover sheet. Then, you’ll mail both forms to the IRS. To file electronically, you’ll use the IRS’s Filing Information Returns Electronic (FIRE) system. If you are filing 250 or more 1099-NEC forms, you can't send paper forms. Instead, you must file electronically.

You’ll also need to give a copy to the recipient for filing with their state tax department (if their state requires state income tax).

As you can see, knowing and utilizing the right forms at your small business can be stressful. But by knowing the important forms for dealing with freelance and gig workers, you can make sure you’re keeping your business moving forward while also ensuring you’re fulfilling your tax obligations as a company.

Ready to work with a payroll partner who can help you determine the correct forms for your business?

Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us.