Step-By-Step 1099 Instructions For Easy Filing

10

Min Read

Tom Smery

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.

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
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.

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