Step-By-Step 1099 Instructions For Easy Filing

10 Min Read

Scope of Work

Taxes

Contractor

Tom Smery

Tom Smery is a certified CPA for over a decade. In his free time, he writes articles to pass on his expert knowledge on taxes and accounting. Thomas has a wide range of deep knowledge on 1099 taxes, and finance topics. You can find him fishing when he is not preparing taxes for his clients or writing about accounting.

1099 instructions will vary based on what kind of 1099 is in play and whether you need to issue a 1099 or if you receive one as a taxpayer. While there are a lot of different rules to follow there are some general guidelines that can apply to everyone (based on the form).

1099 Instructions for the 1099-NEC

Form 1099-NEC is used to report non-employee compensation. This form is fairly new (as of 2020) as it was last used in tax year 1982. It took over the non-employee compensation reporting requirements from the form 1099-MISC.

As a result, there are a lot of instruction for the 1099-NEC you may not be aware of.

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When Do you Need to Complete and File a Form 1099-NEC

There are two separate scenarios which will require you to complete this form and provide to the IRS, applicable State Treasury, and payment recipient.

The first related to royalty payments. If you pay a self-employed person a royalty payment of $10 or more during the tax year, you must provide the 1099-NEC. In just a moment, we'll go over the step-by-step instructions on filing a 1099-NEC.

The second is related to all other payments of at least $600. If you pay a self-employed person at least $600 for any of the following then a 1099-NEC is required.

Rents
Prizes and awards
Medical and health care payments
Payments to an attorney
Fishing boat proceeds
Other income payments (including crop insurance proceeds)

If you submit the wrong form for filing, you'll need to void the 1099.

How to Fill Out a 1099-NEC

Payer’s Name, Address, and Phone Number

The first box (top left-hand side) asks for information about you and your business. The information is need by the IRS but if you select the correct envelope, it can also act as the return address when you mail a copy to the payee.

The required information includes:

Name (Business or Personal - depending on how your business is setup)
Street Address
City/Town
State/Province
Zip/Foreign Postal Code
Telephone number

Payer's TIN

You must enter your taxpayer identification number (TIN). Depending on what business entity you are reporting as, this will either be your social security number (SSN) or your business's employer identification number (EIN).

Recipient's TIN

You must enter the recipient's (payee's) taxpayer identification number (TIN). Assuming you have been following standard best practices, you should have received this information on the payee's W-9 form. If you do not have a W-9 for the payee then two steps should be taken.

First, you need to contact the payee to gather the necessary information. Second, you need to add the collection of a W-9 to your standard operating procedures to ensure this is not an issue moving forward. If you working with a bookkeeper, accountant, or tax professional they may be collecting this information on your behalf.

Recipient's Name

The only piece of information in this box is the recipient's name. It is important to consider that if you are working with someone you know, you may already know their actual name but that doesn't mean it is the name they are working under. Again, the W-9 will provide you with this information.

Recipient's Street Address

The only piece of information to enter into this box is the recipient's street address. Again - the W-9 will provide you with this information. It is important to note that the street address is typically the mailing address of the recipient but this will not always be the case.

Recipient's City, State, and ZIP

The only piece of information to enter in this box is the recipient's city, state, and zip. The W-9 will have this information. As mentioned above, these boxes combined will allow you, if the correct envelope is purchased, to use these boxes to indicate the mailed address and eliminate the need for you to manually fill out the mailing envelope.

Account Number

This box is optional. You only need to include an account number if you provided the contractor with a unique account number that corresponds with your records. If you did not create a unique account number then you will leave this box blank.

Box 1 - Nonemployee Compensation

Box 1 is where you will enter the full amount of payments to the nonemployee during the tax year. Please remember this includes all of the following payments:

Payments made to someone who is not an employee
Payments made for services in the course of your business or trade
Payments made to individuals, partnerships, estate, and potentially a corporation (depending on how the corporation is setup as a legal entity)
Payments made to anyone else during the year if the amount was greater than $600

Box 1 is extremely important because it is what the payee will use when filing their income tax return which dictates their self-employment tax amount. If the payment is not subject to self-employment tax then you will likely be reporting it on a 1099-MISC instead of a 1099-NEC.

Box 2 - Direct Sales

Box 2 can be tricky depending on what you are selling and the intent of the purchaser. If you made direct sales of more than $5,000 to a consumer and the products you sold are considered consumer products for resale, buy-sell, deposit/commission, or any other basis. If this is applicable, you will enter an "X" in Box 2.

If you are already providing a 1099-MISC to this person/entity, you can also enter an "X" in Box 7 of the 1099-MISC instead of providing the NEC.

Box 3 - Ignore for Now

Box 3 currently does not serve a purpose. According to the IRS, Box 3 is reserved for "future use" but does not need to filled out based on current processes.

Box 4 - Federal Income Tax Withheld

In most cases you will not be withholding federal income taxes from payments made to nonemployees but there are some situations which do require this. For example, if the wages are subject to backup withholding, it is your responsibility to withhold federal income taxes and then submit those taxes to the IRS.

The IRS will tell you if backup withholding is required - this is not something you will need to determine on your own. The IRS will notify you that the payee's TIN is incorrect or you received an incorrect TIN on the W-9 the payee completed for you. If this happens, the backup withholding rate (as of 2021) is 24% of the payee's gross wages.

Box 5 - State Taxes Withheld

Similar to Federal income taxes, you normally will not withhold state income taxes. If there is a reason to withhold, based on state regulations, you would provide that information in this box. It is important to keep in mind that the 1099-NEC only allows you to report withheld payments for a maximum of two states.

Box 6 - State/Payer State Number

If you did not withhold state taxes then this box will be left blank. If you did withhold state taxes then you will need to include the abbreviated name of the state and your state identification number. While not identical, this is essentially what you include for your employees on the W-2.

Box 7 - State Income

In most cases this box will be zero (0). The only time to input an amount is if you were directed by the state to withhold state income tax.

Understanding the Different Copies of the 1099-NEC and How to File Them

There are multiple copies of the 1099-NEC which must be provided to several parties. Please note that each copy has an identical layout, but the "Copy" identifier is unique based on where it needs to be sent. The purpose of this is to make recordkeeping on your end easier.

Copy A of the 1099-NEC goes to the IRS. Copy A is also known as "The Red Copy" as the default form is a bright red instead of black. The official version of Copy A is scannable but the online version is not. Do not print and file a copy that is not scannable. The IRS may impose a penalty if a non-scannable version of the Copy A is filed.
Copy 1 of the 1099-NEC goes to the applicable State department (or multiple state departments).
Copy B of the 1099-NEC goes to the recipient. If you are the issuer, this copy goes to your non-employees. If you are considered a non-employee then this is the copy you will receive.
Copy 2 of the 1099-NEC is received by the recipient and provided with their State income tax return.
Copy C of the 1099-NEC is for the payer. This copy is for recordkeeping purposes only and does not need to be summited to any external entities.

In the next section, we'll go over how to file. Remember, the IRS will catch a missing 1099, so you'll need to make sure you file.

How to File the 1099-NEC with IRS

There are two ways to file this form with the IRS. The first option is mailing the form to the IRS. Typically, if you are mailing the form this is also when you would mail a copy of the form to your State Treasury. The second option is to file online. To file online, you will use the IRS Filing Information Returns Electronically (FIRE) system. To use this system, you will need to create a New Account (if you do not already have one) and then follow the step by step instructions provided in the website. If you made any errors, you'll need to file a 1099 amendment.

1099-NEC Due Dates

The 1099-NEC must be filed with the IRS by January 31st. If the 31st falls on a weekend or holiday, the due date for the 1099-NEC is the following business day. In most cases, any state due dates will coincide with the federal due dates for simplicity purposes; however it is always best to double check the regulations for your specific state.

Keep in mind, the Federal due date is both the date your 1099-NECs must be filed with the IRS but also the due date for providing it to your non-employees. Additionally, there is no automatic 30 day extension (unlike many 1099 forms) and the IRS will not share the 1099-NEC data with states which is why filing a separate form with your state is essential. Learn more about 1099 extension filing here.

1099 Instructions for the 1099-MISC

In many ways, the 1099-MISC is the same as the 1099-NEC. The key difference is knowing which form applies to each situation. All of the payer and payee information layouts is the same. The difference is what will be reported in each box.

The 1099-MISC - Box 7

In case you are not familiar with the 2020 changes, Box 7 is the primary change made to the 1099-MISC form. Previously, Box 7 was used for nonemployee income. With the current version, Box 7 report the direct sales of consumer products worth $5,000 or more if the products were aimed for resale.

1099 Confusion

It is easy to be confused by the 1099-NEC/1099-MISC forms because some of the information can be reported on both. The key decision factor is who is the payee. If the payee is considered a non-employee then the 1099-NEC is likely the correct form. If you have other 1099 questions, we recommend you speak with a tax professional or CPA.

Additional 1099-MISC Boxes

In general the 1099-MISC boxes have not changed but since non-employee income is no longer an option it is worth revisiting the current box layout. Keep in mind the below is not including the standard payer/payee address information that mirrors the 1099-NEC.

Box 1 - Rents
Box 2 - Royalties
Box 3 - Other Income
Box 4 - Federal Income Tax Withheld
Box 5 - Fishing Boat Proceeds
Box 6 - Medical and Health Care Payments
Box 7 - Payer Made Direct Sales totaling $5,000 or more of consumer products
Box 8 - Substitute Payments in lieu of dividends or interest
Box 9 - Crop Insurance Proceeds
Box 10 - Gross proceeds paid to an attorney
Box 11 - Fish purchased for resale
Box 12 - Section 409A deferrals
Box 13 - Excess golden parachute payments
Box 14 - Non-qualified deferred compensation
Box 15 - State tax withheld
Box 16 - State/Payer's state number
Box 17 - State Income

What Defines a Verbal Contract?

A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.

Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.

Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.

The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.

Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.

When is a Verbal Agreement Legally Binding?

For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:

Offer and acceptance: An offer is made and accepted by another party involved in the agreement;
Consideration: The involved parties must exchange something of value (money, a service, time, etc), this is known as consideration;
Intention and certainty: All parties must fully understand the terms of the contract and intend to make a legally binding agreement freely; and
Capacity: The parties must have the capacity to legally enter into the contract; they're above age and of a stable mindset.

Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.

How strong is a verbal agreement in court?

Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.

If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.

That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.

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When are verbal agreements not enforceable?

There are some types of contracts which must be in writing.

The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:

The sale of real estate or vehicles
Real estate leases lasting longer than one year.
Property transfer following the death of the owner.
The case of a party agreeing to pay debt for someone else.
Any contract that requires more than a year to fulfil.
A contract involving and exceeding a specified amount of money (which varies by state).

Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.

Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.

How are Verbal Contracts Enforced?

Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?

How can you prove an oral contract?

Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!

If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.

Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.

Written vs Verbal Contracts: What's the Verdict?

Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.

So, ultimately, the question is: written or verbal agreements?

Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.

Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.

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Say hello to digital contracts

Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.

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Benefits of written contracts

A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.

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