Form 1099-NEC: What’s important for independent contractors

There’s a new IRS form in town, Form 1099-NEC. Starting in tax year 2020, instead of reporting nonemployee compensation through Form 1099-MISC, businesses with contractors will need to file IRS Form 1099-NEC. And, if you do independent contracting work for a company, you probably will receive a 1099-NEC.

Read on to find the answers to what a 1099-NEC is, who files and receives it, when it’s due, and how to fill it out.

What is 1099-NEC?

First order—let’s answer the question “What is 1099-NEC?”

Form 1099-NEC recently re-emerged from hibernation—it hasn’t been used since 1982. NEC is short for nonemployee compensation. As the name implies, Form 1099-NEC reports payments given to contractors or vendors throughout a tax year for trade and business. The IRS now wants to separate reporting of payments to contractors to improve clarity of deadlines and ensure you timely report these payments. Thus, they redesigned the old version for use in tax year 2020 and beyond.

Businesses must provide independent contractors Form 1099-NEC and file with the IRS by January 31. In prior tax years, a business needed to figure out which one of the various deadlines for Form 1099-MISC applied to their payments.

There are multiple copies – each due to different entities.

• Copy A: For the IRS
• Copy 1: For the state tax department
• Copy B: For recipient (contractors)
• Copy 2: For recipient’s state income tax return, when required
• Copy C: For the payer

Who should file Form 1099-NEC?

If you’ve hired a contractor (W-2 employee) and paid at least $600 in a tax year, you should file Form 1099-NEC.

In contrast, contractors will receive a 1099-NEC from their clients who paid them at least $600 in a tax year.

1099-NEC vs. 1099-MISC

So, what’s the difference between 1099-NEC vs. 1099-MISC? The 1099-MISC is still used, but for things such as rentals, royalties, certain prizes and awards, or professional fees. (MISC is short for miscellaneous income.) If you still need to report those items, you may also need to file Form 1099-MISC.

1099-NEC instructions

If you’re a small business owner that has paid an independent contractor, fear not! This tax form is one of the easier ones to fill out, thankfully.

If you’re an independent contractor, the company that hired you will complete and send this form to you, so you can use information on Form 1099-NEC to help complete and file your tax return with the IRS.

Whether you’re filing the form on your own return or need to send it to contractors, Block Advisors certified small business tax pros can help.

Just need to understand what’s on the form? Check out this summary of 1099-NEC instructions.

Form 1099-NEC includes the following:

• Your business, the payor’s, information including
  • Name
  • Street address
  • Telephone number
  • Tax information number (TIN)
• Recipient’s identifying information, including:
  • TIN
  • Name
  • Street address
  • Account number (used if the business has multiple accounts for a recipient or has a FATCA reporting obligation)
• Nonemployee compensation amount
• Federal income tax amount withheld ($0 unless you have a backup withholding order from the nonemployee)
• State-specific information, like:
  • State tax withheld
  • Business state identification number
  • State income amount

The IRS also has specific instructions of not to cut or separate forms.

How to file Form 1099-NEC and when it’s due

Independent contractors receiving Form 1099-NEC: You’ll likely report your 1099-NEC income on Schedule C along with your Form 1040.

Business owners preparing Form 1099-NEC for contractors: IRS 1099-NEC is due January 31. If January 31 falls on a weekend, the form is due the next business day.

• Copy A is due January 31 to the IRS.
• Copy B of the form is due to your contractor by January 31.

This form should always be filed with the IRS alongside IRS Form 1096.

You have a few options for filing Form 1099-NEC and Form 1096:

1. Order forms from the IRS and mail them to the IRS and state treasurer
2. File electronically via IRS FIRE system
3. Have a tax pro help you out.

Getting help with Form 1099-NEC

Whether you’ve a receiving this form or issuing one to a contractor, 1099-NEC is one such form you don’t want to avoid filing—as the failure to file could come with additional tax penalties.

In addition to that, taxes can be a big strain when you don’t love doing them. But we do, and we’re here to help. Our small business certified tax pros specialize in taxes. And we guarantee 100% accuracy in our taxes, bookkeeping, and payroll. Make an appointment today!

“Being an individual with mostly freelance work, filing taxes can become quite confusing and complicated. With the help of a tax professional, the process was more smooth and simple than I could’ve imagined.”

– Rachael, Independent contractor | April 2021