The Internal Revenue Service (IRS) requires that businesses file Form 1099-NEC to record payments made to independent contractors. The new form replaces using Form 1099-MISC for these types of payments. The 1099-MISC is used for several different types of payments—from prize winnings to crop insurance proceeds—with some having different filing deadlines than others.
What is a 1099-NEC?
Form 1099-NEC is a new form that businesses are required to file with the IRS annually to report nonemployee compensation (NEC). This means that if you've made payments to individuals or companies for services who are not your employees, you may be required to file this type of information return. Nonemployee compensation was previously filed in box 10 on the 1099-MISC form. If you'll still use it for other types of payments be sure to enter the information in the right boxes, since they're now in different places.
What payments need to be reported on 1099-NEC forms?
The IRS hasn't changed which NEC payments need to be reported, just which form you'll use. Follow the guidelines for nonemployee compensation payments listed on the IRS website. Here's an overview.
You'll file a 1099-NEC if all four of these criteria are met:
- The payment was to someone who isn't your employee. You may refer to them as an independent contractor, a freelancer, or just a small business. They may use their own name, a business name, and could even have a name that includes LLC (Limited Liability Company). An LLC is a legal term that doesn't tell you about how they report their taxes, so if you're unsure whether they need a 1099-NEC, it's best to check with them or provide one to them anyway.
- You paid them from your business. If you don't have a business, you don't need to issue 1099-NEC forms. Most of the time the payments will be for services, but they'll sometimes include payments for items that are needed in order to perform the services, such as the cost of a small car part that was replaced by a mechanic.
- Your payments were made to an individual, partnership, estate … or in some cases, a corporation. Attorneys within corporations are the exception. If your business has paid for legal services, you'll need to issue them a 1099-NEC. Other than for legal fees, if you see “Inc.", “Corporation", or “Incorporated" within a company's name, you won't need to issue a 1099-NEC.
- You've paid them a total of at least $600 during the year … with two exceptions. For attorney services, you'll need to file a 1099-NEC regardless of the amount you've paid them, even if it's only $5. The second exception is that you'll need to file a 1099-NEC in any dollar amount if you've withheld Federal taxes for the payee. You could be required to withhold taxes and remit them to the IRS if you're sent a notice that requires it, or if the individual hasn't provided you with a tax identification number. When that happens, you are obligated to withhold taxes and remit them to the IRS on their behalf, and you're required to issue a 1099-NEC at the end of the year.
When are 1099-NEC forms due?
The forms are due to be sent to both the recipient (who you paid the money to) and to the IRS on or before January 31st. When the date falls on a weekend, you'll have until the end of the following business day.
How do you file 1099-NEC forms?
You can complete 1099-NEC forms using a fillable PDF form available on the IRS website. You'll mail one copy to the payee and submit a copy of each one to the IRS with Form 1096. Software companies and online websites also provide filing and mailing services, generally for a small fee per form. If you will be filing 250 or more 1099-NEC returns, you're required to submit them electronically to the IRS.
Check your state's requirements for what you need to do to report nonemployee compensation to them. Not all states have identical requirements to the IRS. Also, you'll want to make sure that the taxpayer identification numbers used on your 1099-NEC forms match with the payee names. You can be penalized if they don't agree with what the IRS has on file. You can verify the numbers with the individual or check online with the IRS.
Keeping up with IRS regulations can be challenging for business owners, but when you take things one step at a time and utilize trusted advisors and resources to work through your situation, you're sure to figure it out. Learn more about hiring independent contractors if you work with them in your business.