What is Form 1099-NEC?
Form 1099-NEC, Non-Employee Compensation, by the Internal Revenue Service (IRS) is a form used by businesses to report payments made to independent contractors like freelancers, sole proprietors, and self-employed individuals. This form should be completed by businesses if they paid $600 or more to a non-employee during the year. This includes fees, prizes, service awards, and commissions completed by independent contractors. This also includes cash payments for fish purchased from anyone in the fish industry and even payments made directly to legal services. The 1099-NEC form should also be completed by any person from whom federal income tax from non-employee compensation has been withheld. Provided that it is under backup withholding rules.
The 1099-NEC IRS form is a redesign of a 1982 form that bears the same name. This was done to address the confusion that is related to the dual-filing deadlines on the 1099-MISC form. The IRS also resurrected the form to address the significant fraud relating to individuals falsifying their 1099-MISC forms by reporting large withholding and small employee compensation. Thus, this form will now be issued to any persons or companies, paid for their services, who are not on the payroll. The IRS has listed down some factors to help businesses determine if they need to fill out the 1099-NEC IRS Form, such as the following:
- The payment made to independent contractors is $600 and above; otherwise, Form 1099-NEC should not be issued.
- The services performed by independent contractors are for business purposes. If the services made by the independent contractors are for personal reasons, Form 1099-NEC should not be issued.
- Businesses should issue a 1099-NEC form if they enter a contract with an LCC sole proprietorship company.
- There is no need for a business to issue Form 1099-NEC to C-Corporations and S-Corporations. However, a 1099-NEC IRS form should be issued if payments are directly handed to the following:
- Medical and healthcare professionals
- Legal counsels or attorneys.
- Commissions paid to nonemployee salespeople that are subject to repayment should also receive From 1099-NEC.
How to fill out Form 1099-NEC?
Form 1099-NEC, Non-Employee Compensation, consists of 5 copies that have the same fields. These copies are sent out to different recipients. Here are the recipients of Form 1099-NEC:
- Copy A – This is for the Internal Revenue Service Center.
- Copy 1 – This copy is for the State Tax Department.
- Copy B – This copy is for the taxpayer.
- Copy 2 – This copy should be filed with the state income tax return of the recipient when required.
- Copy C – This copy is for the payer.
Mark “void” if the form is nullified; otherwise, mark “corrected” if the form has been corrected.
Enter the name of the payer, his or her address, including the street, city or town, state or province, country, ZIP or foreign postal code, and telephone number.
Enter the TIN of the payer.
Enter the TIN of the recipient.
Enter the full name of the contractor.
Enter the street address of the contractor. Include the apartment number.
City or Town, State or Province, and ZIP or Foreign Postal Code
Enter the city or town, state or province, and the ZIP or the foreign postal code of the contractor.
Enter the account number of the contractor.
2nd TIN not.
Mark the box if the IRS has already notified you twice within three calendar years that your recipient provided an incorrect tax ID number. Do not check the box if:
- you received both IRS notices in the same year; or
- you received the notices in different years but both are related to information returns that are filed in the same year.
Item 1: Nonemployee Compensation
Enter the total amount of payment given to the contractor during the year.
Item 2: Direct Sales
Mark the box if you have made any direct sales of consumer products to the recipient for resale purposes that amount to $5,000 or more.
Item 4: Federal Income Tax Withheld
Enter the federal income tax Withheld.
Item 5: State Tax Withheld
Enter the state tax withheld.
Item 6: State/ Payer’s state No.
Enter the abbreviated name of the state, as well as your state identification number if you withhold state tax. This is the state tax ID number of your business which is assigned by the State Department Revenue.
Item 7: State Income
Enter the amount of the state payment.
Instructions for the recipient receiving Form 1099-NEC
If you receive Form 1099, this means that the payer did not consider you an employee. This also means that the payer did not withhold any tax including income tax, social security tax, and Medicare tax. However, if you think you are an employee of the payer and you could not get him or her to correct this form, you may report this amount under “wages, salaries, and tips” of Form 8919 and attach it to your return. Meanwhile, if the amount in this form is not a self-employment income, report it under “other income” on Schedule 1 of Form 1040.
Instructions for the payer in filling out Form 1099-NEC
For payers to complete form 1099-NEC, they may use:
- The 2021 General Instructions for Certain Information Returns, and
- The 2021 Instructions for Forms 1099-MISC and 1099-NEC.
Remember that filing Form 1099-NEC that is printed from the IRS Website cannot be filed.
Do employers need to fill out Form 1099-MISC alongside Form 1099-NEC?
No. The IRS already removed reporting of nonemployee compensation from the 1099-MISC Form for the tax year 2020 onwards. Since the form 1099-NEC was redesigned, here are some of the changes:
- Box 7 which previously reported nonemployee compensation, was changed to reports on direct sales of $5,000 or more.
- Other information reported on the form now shows in renumbered boxes.
When should payers file Form 1099-NEC?
In a general tax year, payers must file these forms by January 31. Normally, businesses have no automatic 30-day extension to file, unless they meet certain obstacles or hardship conditions.