How to File 1099-NEC - Your Ultimate Guide to Contractor Taxes

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Taxes

Scope of Work

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.

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 form 1099-NEC and how you should file it.

Why Was Form 1099-NEC Added?

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.

If you are looking for an easy way to track 1099 business expenses, try Bonsai Tax. Our software will automatically organize your receipts and track your business expenses to save you a lot of money during tax time.

Who Receives Form 1099-NEC?

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:

Payments Over $600

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).

Services for Business Purposes

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.

Contracts with LLC Sole Proprietorship

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.

Certain Corporations

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:

Attorney fees
Healthcare and medical costs
Substitute pays in place of tax-exempt interest or dividends.

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.

When Should You File A 1099-NEC Form?

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:

You paid someone that is not your employee
You made a payment to a partnership, estate, individual - and in certain circumstances, a corporation.
You paid for the services of someone in your trade or business (i.e., a nonprofit organization or a government agency.
You made payments of at least $600 to one person throughout the whole tax year.

As these conditions are met, you may proceed to file your taxes.

What Are the Boxes and Fields of Form 1099-NEC?

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:

Box 1 - Nonemployee Compensation

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.

Box 2-3 - Reserved

These boxes are reserved and are not to be completed when filing for nonemployee compensation.

Box 4 - Federal Income Tax Withheld

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:

Professional service fees like attorney and corporation fees, architects, independent contractors, engineers, and so on.
Payments that attorneys make to professionals in legal adjudication and witnesses.
Payments made from one independent contractor to another, such as a referral fee or a fee split.

Box 5-7 - State Information

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.

How Do I File a 1099-NEC?

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:

Step 1: Create a login account. The process is entirely free.
Step 2: Log into the account dashboard.
Step 3: Browse your dashboard and locate the tax form
Step 4: Add the required information into the 1099-NEC form. This includes information such as your social security number or independent contractor payments from a particular trade or business.
Step 4: Double-check the information you need to report on the form, and submit it to the IRS at the end of the tax year.

What Do I Report on a 1099-NEC?

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:

The nonemployee compensation that you report in Box 1 of form 1099-NEC is often categorized as income from self-employment. This means that it is also subjected to self-employment tax.
Payments to independent contractors that are not reported on form 1099-NEC are usually reported on form 1099-MISC. In this case, they are also reported as self-employment income.

To quickly see how much you owe in self-employment taxes this calendar year, try our freelance tax calculator to estimate it for you.

All About Box 1

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:

Commissions given to nonemployee salesmen that are subjected to repayment, but do not receive that repayment throughout the year.
Fees paid from one professional to another
Professional service fees
Payments for services (including payments for the parts or the materials that have been used)
Attorney fees, or fees that were made to witnesses

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.

What Is the Due Date for Form 1099-NEC?

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 the 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.

Penalties for Missing the Due Date of Form 1099-NEC

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.

Maximum Penalty

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.

The Bottom Line

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!

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.

There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.

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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