Form 1099-NEC

Recent changes to IRS Form 1099-NEC

Form 1099-NEC is a tax form used to report nonemployee compensation paid to independent contractors and freelancers, typically when the amount totals $600 or more in a tax year. This form must be filed with the IRS and provided to the recipient.

The biggest recent change is that this form replaces IRS Form 1099-MISC for nonemployee compensation. The “MISC” in 1099-MISC stands for miscellaneous income, so that form is used to record various types of payments including rental income, attorney fees, and healthcare payments. Prior to 2022, the 1099-MISC form was used for reporting nonemployee compensation (payments to contractors) under Box 7, but now, the 1099-NEC form replaces that function.

Other changes as of Jan. 2022 include:

• IRS Form 1099-NEC is designed for “continuous use,” meaning the IRS no longer releases a new version each year, and the current template can be used in future years until revisions are made.

• Businesses reporting cash payments for purchases of fish for resale no longer use Box 1 of Form 1099-NEC, but now use Box 11 of Form 1099-MISC instead.

• Businesses reporting sales of consumer products for resale no longer use Box 7 of Form 1099-MISC, but now use Box 2 of Form 1099-NEC.

• Box 7 on Form 1099-MISC is now used to report direct sales of $5,000 or more.

• The box for reporting the Foreign Account Tax Compliance Act (FATCA) filing requirement has been removed.

What is nonemployee compensation?

Nonemployee compensation refers to payments made to individuals who are not classified as employees. This includes payments for services performed by independent contractors, freelancers, and other self-employed individuals. Nonemployee compensation can encompass many different types of payments, including:

• Fees

• Commissions

• Prizes and awards for services

• Other forms of compensation for services rendered

Who uses IRS Form 1099-NEC?

Employers use Form 1099-NEC to report payments made to independent contractors and freelancers. Any business that pays $600 or more to a nonemployee in a tax year must file Form 1099-NEC with the IRS and provide a copy to the worker.

Exceptions to Form 1099-NEC

Certain payments are not required to be reported on Form 1099-NEC, such as:

• Payments to corporations (with some exceptions for legal services)

• Payments for merchandise, goods, or other tangible items

• Payments made via third-party network transactions (these are reported on Form 1099-K)

• Wages paid to employees (reported on Form W-2)

You also don’t need to file a 1099-NEC if you hire independent contractors who are registered as S-Corps or C-Corps. Check the Form W-9 they provided you for their filing structure.

1099-NEC vs 1099-MISC

Should you use Form 1099-NEC or 1099-MISC? Form 1099-NEC specifically reports nonemployee compensation, whereas Form 1099-MISC is used for various other types of payments, including:

• Rent

• Royalties

• Medical and healthcare payments

• Payments to attorneys (in certain cases)

• Other miscellaneous income

How to fill out Form 1099-NEC

To fill out Form 1099-NEC, follow these steps:

1. Fill in the payer’s information. Enter the payer’s name, address, and taxpayer identification number (TIN).

2. Fill in the recipient’s information. Enter the recipient’s name, address, and TIN.

3. Fill in the nonemployee compensation amount. Report the total nonemployee compensation paid to the recipient in Box 1.

4. Fill in the federal income tax withheld. If any federal income tax was withheld, enter the amount in Box 4.

5. Fill in the account number box. This is optional and can be used if you have multiple accounts for a recipient.

6. File the right copies with the right agencies. Ensure you provide Copy A to the Internal Revenue Service (IRS), Copy B to the recipient, and retain Copy C for your records. Many states also require businesses to send a copy to the state tax office, too.

How to file Form 1099-NEC

You can file Form 1099-NEC electronically or by mail:

• To e-file: Use the IRS Filing Information Returns Electronically (FIRE) system. Many payroll, accounting, tax preparation, and tax filing software solutions also offer e-filing options.

• To file by mail: Send the completed forms to the appropriate IRS address. Ensure you include Form 1096, the transmittal form, if filing by mail.

How to record a Form 1099-NEC on a tax return

All recipients of a Form 1099-NEC should report the recorded income on their income tax returns. Since this is self-employment income, it’s typically recorded on a Schedule C if they’re a sole proprietor, or on a Schedule K-1 if they’re in a partnership. Self employed workers are required to make income tax and self employment tax payments (including both state and federal taxes like social security and medicare tax) on any income recorded on a Form 1099-NEC.

Deadline for Form 1099-NEC

The due date to file Form 1099-NEC with the IRS and provide a copy to the recipient is Jan. 31 of the year following the tax year in which the payments were made.

Penalties for missing the deadline to file Form 1099-NEC

Failing to file Form 1099-NEC on time can result in penalties, which increase the longer you wait after the deadline has passed. Penalties vary based on how late the form is filed and can range from $50 to $270 per form. Deliberate disregard for filing requirements can result in even higher penalties.

Frequently asked questions about Form 1099-NEC

Where can I get Form 1099-NEC?

You can obtain Form 1099-NEC from the IRS website, your local IRS office, or through tax software that offers forms and e-filing services.

Can you use tax software to file Form 1099-NEC?

Yes, many tax software programs support Form 1099-NEC and offer features for e-filing directly with the IRS.

Can you correct a Form 1099-NEC from a prior year?

If you need to correct a Form 1099-NEC from a prior year, you must file a corrected form. Instructions for correcting errors can be found on the IRS website. You also need to provide a copy of the corrected form to the recipient.