Form 1099-NEC is essential when it comes to filing self-employed income; however, not many know how to file 1099-NEC. The confusion is understandable, as the form was only released in 2020 as a better tax-reporting alternative to form 1099-MISC.
While similar, the two forms have their differences. To make matters easier for you, this article will tell you everything about the tax form and how you should file the 1099-NEC before the due date.
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You might be wondering at this point: we had the 1099-MISC form, so why did we need form 1099-NEC? To be fair, form 1099-NEC was originally used back in 1982. Eventually, people began using a new form in order to file for tax returns.
People would use Box 7 of 1099-MISC to report income for independent contractors. In 2020, however, a "new" form was added - which is technically the old 1099-NEC tax form.
The problem was that depending on the type of income reported, users would have to abide by different deadlines. To avoid these confusions, the IRS decided that they ought to reintroduce the 1099-NEC.
On this form, there is just one filing deadline for all the payments made. It is also more organized, which makes it much easier to deal with.
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Form 1099-NEC is required to report payments as an independent contractor for the tax year following 2020. Short for nonemployee compensation, the 1099-NEC form was added in place of box 7 present in form 1099-MISC.
Those who get form 1099-NEC are typically independent contractors, third-party accounts, and janitorial services that aren't a part of anyone's payroll. As a result, if you are a freelancer offering outsourcing services, the chances are that you will receive form 1099-NEC.
With that in mind, there are still certain IRS regulations that will determine whether you get a form 1099-NEC or not. Here are some of those factors:
A rule of thumb is that if the payment went over $600, the contractor will receive form 1099. If the payment is under $600, then the form won't be released, nor will it be necessary. The payment is made for services or products that do not have a physical form (i.e., an item you'd buy from the store is excluded).
If a service is given for business purposes, form 1099-NEC will be issued. For instance, let's say that you hire a contractor to renovate the break room in your office. If the total sum comes at, say, $6,000, then you'd have to issue form 1099.
Things change if this shifts from business to personal purposes. If you hire the same contractor to renovate your living room, then there won't be a need for form 1099-NEC. This is because your personal home is not deemed a trade or business.
If you are working with an LLC sole proprietorship, then you will have to send out a form 1099-NEC to the IRS. The fastest way to find out whether they are an LLC sole proprietorship or not is to look at the form W-9 they gave. The data should be there for you to see.
Many believe that if they collaborate with a corporation, they won't have to send out a Form 1099-NEC. In most circumstances, this is true - but not all the time.
In most circumstances, you won't have to send out a form 1099-NEC if you are dealing with an S or C-Corporation. However, there are certain exceptions to the rule, including:
There are also some other exceptions to consider, such as the cash payments made for fish (yes, you read that right). This is also a clause taken from the form 1099-MISC.
Technically speaking, you should file form 1099-NEC when you make a payment of at least $600 to someone who is not your full-time employee. Where your trade or business is involved, they are not on your payroll. The pay also needs to be for business purposes, as a personal service is not reported.
Here are the circumstances that ask you to file the 1099-NEC form:
As these conditions are met, you may proceed to file your taxes. Let's go over some 1099 instructions to file.
Like the form 1099-MISC, form 1099-NEC has multiple fields where you may report nonemployee compensation and federal income tax to the IRS. You need to add information such as name, TIN, and address for both the payer and the receiver.
That being said, these are the boxes you will find in the tax form for self-employment tax, nonemployee compensation, and other similar taxes:
In this box, you will add nonemployee compensation for payments over $600. For example, if you are dealing with a fee reimbursement for an independent contractor or someone that is not on your payroll, you will have to deal with filing form 1099-NEC.
These boxes are reserved and are not to be completed when filing for nonemployee compensation.
In this box, you will enter backup withholding tax information. For instance, payees that haven't provided their TIN to payers are subjected to payment withholding from Box 1.
In the event that the payee didn't provide their TIN to the payer, backup withholding will occur on different payments:
These boxes are given for your convenience, and you do not necessarily have to complete them for the IRS. If the spaces are left blank, it will not necessarily affect you when it comes to your tax return.
If your state income tax is withheld as you make this payment, then you can add it to box 5. In the Box 6 on the 1099, you may add the state abbreviated name, along with the social security number of the person in question. In the 7th box, you may enter the state payment amount.
To file for nonemployee compensation on 1099-NEC, you will use Box 1 to report any income from self-employment. Rather than putting this information on form 1040 or form 1099-MISC, you will be writing this in schedule C.
The filing process is overall easy, as you can use the tax platform provided by the IRS. Here are the steps that you will have to go through:
The 1099-NEC form will report nonemployee compensation that was related to a particular trade or business of a company. Self-employment income is reported so that the person may receive a tax return on their income.
Here are some aspects of the 1099-NEC form:
To quickly see how much you owe in self-employment taxes this calendar year, try our freelance tax calculator to estimate it for you.
Depending on the trade or business, the IRS will also offer a list of the payment types that need to be reported in Box 1. Some of these payments may be:
Usually, the income that needs reporting will be made clear to you by the IRS. Check their platform to ensure you have all the data right.
In certain circumstances, you may adjust the filing deadline for form 1099-NEC. Still, the deadline is January 31 at most. You may file the paper to the IRS both electronically or by physical mail, making sure that it reaches the recipient by the deadline.
Form 1099-NEC doesn't have an automatic extension. If you miss it, you might not get your tax return back. That being said, if you cannot file it by the deadline and have a legitimate reason for it, then you can contact the IRS. They might be able to offer you an extension.
Bear in mind that in order for the extension to apply, you'll have to make an extension request before January 31. If it occurs before that date, then you will mix your deadline and may be subjected to penalties.
In certain cases, the due date may be bumped a day if January 31 falls on a bank holiday. In these circumstances, you may deliver form 1099 by February 1.
Similar to form 1099-MISC, form 1099-NEC also features penalties for not filing 1099 forms or missing the deadline. Depending on the circumstances, the penalty may go from $50 to $270 for every missed form.
The more days pass, the higher the penalty fee will be. This is why you must always file the form on time. The more you ignore your state tax notice, the more you will have to pay for it.
Technically speaking, there is a maximum penalty that may be applied per year - and that penalty is $556,500. If a business purposely ignores the notice, they may receive a penalty of minimum $550 per form, or a 10% fee of the income that they stated on their report.
Filing the 1099-NEC is easy, as long as you respect the instructions on the form. Make sure that you pay the correct amount so that you are not subjected to penalties. The form may be submitted physically or electronically, depending on your preferences. If you want to make your life easier, try Bonsai Tax. Our tax software for freelancers can help ease the burden of paying taxes!
