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