Tax season can be challenging, especially if you’re an employer or a small business owner. Not only do you have to file your own taxes, but you also need to send out tax forms to the people you hire so they can file theirs.
If you work with independent contractors instead of hiring salaried employees, you don’t have to worry about withholding payroll taxes. But you do need to report the income you pay them on Form 1099-NEC if it’s $600 or more during the tax year.
In other words, if you pay any nonemployee at least $600 in one tax year, you need to report that to the Internal Revenue Service (IRS) using a 1099-NEC form.
What Is Form 1099-NEC?
Businesses use IRS Form 1099-NEC to report nonemployee compensation, including payments to independent contractors, sole proprietors, freelancers, and other self-employed individuals.
In 2020, the IRS reintroduced the 1099-NEC form as the method for reporting independent contractor income. Before that, businesses would report nonemployee income on box 7 of Form 1099-MISC for miscellaneous income.
Form 1099-NEC vs. 1099-MISC
Form 1099-NEC was brought back after the IRS uncovered tax fraud issues and confusion related to Form 1099-MISC.
As a result, businesses must use the new Form 1099-NEC to report payments to independent contractors and self-employed individuals. Form 1099-MISC is still in use, but it’s meant to report miscellaneous income from rent, prizes, and attorney payments.
When Is 1099-NEC Due?
Similar to Form W-2, which reports wages paid to employees, businesses must distribute Form 1099-NEC to independent contractors by January 31 of the following calendar year. If January 31 falls on a weekend, the due date becomes the next business day.
Late submission of Form 1099-NEC will result in a fine of $50-$270 per form, depending on how far past the deadline you are. Businesses that intentionally do not send qualifying contractors their payee statement are subject to a minimum fine of $550 per form.
How Many Copies Do I Distribute?
If you distribute paper versions of the form, there are five copies that you’ll need to send out:
- Copy 1: File with the IRS
- Copy 2: File with state agencies if required
- Copy 3: Keep for your records
The contractor’s copies:
- Copies 4 and 5: Send to the contractor
Recipients receive two copies: one for their federal and the other for their state tax returns. If the recipient lives in a state without income tax or files their taxes electronically, you can send only one copy.
Who Gets Form 1099-NEC?
You need to provide a 1099-NEC form to any nonemployees you pay $600 or more for a business-related service in one tax year. Let’s look at who’s included in that definition and who’s not.
Independent Contractors You Pay $600 or More
The term nonemployee refers to independent contractors, freelancers, and sole proprietors you pay on an hourly or project basis. In other words, you don’t pay them a regular salary.
If you paid a nonemployee less than $600, you don’t need to send them a 1099-NEC, even if they provided a service for your business.
For example, say you paid a freelance graphic designer $300 to update your logo, and you didn’t work with them on any other projects. In that case, you do not need to file a 1099-NEC.
Self-employed individuals, including freelancers and independent contractors, are required to report all their income, even if it doesn’t get reported on a 1099-NEC. So, in the previous example, that graphic designer should include the $300 you paid on their tax return, but they don’t need to attach a 1099-NEC form.
Furthermore, you only need to report what you pay to independent contractors for business-related services. Hiring an independent contractor for $10,000 to replace your home's roof is an example of a personal cost that doesn’t require you to file a 1099-NEC form.
LLCs and Sole Proprietors
You don’t need to send 1099-NEC forms to corporations. However, you should always send a 1099-NEC form to LLCs and sole proprietors if you pay them $600 or more for business services.
The type of entity they have will be listed on their W-9 form with their taxpayer identification number (TIN), which you’ll need to fill out their 1099-NEC.
When you make payments to a nonemployee or another company, you should always ask the person you’re paying to submit a W-9 form to have the information you need when filing your tax forms.
Which 1099 to Send to Corporations
While corporations don’t receive the nonemployee compensation form, there are a few cases where you will need to send them–not a 1099-NEC–but a 1099-MISC.
The following payments to corporations are not exempt and will require a 1099-MISC form:
- Payments to a legal corporation for the services of an attorney
- Payments made to a legal corporation as part of a settlement
- Payments for healthcare or medical services
- Payments for fishing boat services
Double-check the recipient’s W-9 form to figure out which type of 1099 form to submit. For example, a freelance attorney who registers as an LLC would require the 1099-NEC, but an attorney working for a legal corporation should receive a 1099-MISC.
How To File Form 1099-NEC: Nonemployee Compensation
The deadline to request a TCC is November 1, and it can take up to 45 days to process. If the IRS approves your application, it’ll give you a five-character TCC that serves as your ID when you transmit electronic tax documents such as 1099 forms.
You cannot just upload a PDF file when transmitting your files online. Instead, you need to find a tax expert or a software provider who can create the proper file formats for your documents. The file formats are outlined in Part C of IRS Publication 1220, which provides instructions for e-filing 1099 forms.
Filling Out Form 1099-NEC
Before you get started on your nonemployee compensation form, you’ll need:
- Your TIN (taxpayer identification number): this will be your federal employer identification number (EIN) if you have one, or it will be your social security number (SSN) if you don’t have an EIN
- Your business address
- Recipient’s TIN or SSN (found on form W-9)
- Recipient’s name and address (found on form W-9)
- Payment information for the recipient
Once you have everything ready, you can fill out your form. Here’s how to fill out each of the boxes.
Box 1: Total Nonemployee Compensation
Enter the total amount of money you paid to the recipient during the previous tax year.
Box 2: Direct Sales of Consumer Product for Resale Exceeding $5,000
Check this box if you purchased $5,000 or more of a consumer product from the recipient with the intent to resell. Do not check this box If you only purchased business services from the recipient.
Box 3: Blank
Leave Box 3 blank.
Box 4: Federal Income Tax Withheld
If you hire an independent contractor who didn't follow IRS income reporting rules previously, the IRS may send you a backup withholding order for that person’s fees. Basically, if the IRS doesn’t trust it’ll get accurate tax payments from the contractor, it has you withhold taxes at a 24% rate.
If this applies to you, the IRS will notify you. You'll withhold the amount from the contractor’s fee and report that amount in box 4.
If you haven’t received any backup withholding orders from the IRS, leave this box blank. Independent contractors are responsible for paying taxes on their self-employment income. You don’t withhold taxes from nonemployees.
Box 5: State Income Tax Withheld
Leave this box blank. Independent contractors are responsible for paying their income and self-employment taxes. You don’t need to withhold taxes from nonemployees.
Box 6: State/Payer’s State No.
If, for some reason, you withheld state tax from your payments, enter your two-letter state abbreviation and state identification number. This is also left blank in most cases since businesses don’t have to withhold taxes from payments to independent contractors.
Box 7: State Income
Enter the total amount of money you paid to the recipient during the previous tax year. If you were issued a backup withholding order and withheld the 24% of the contractor’s fee for income taxes, the amount in box 7 will be much lower than the amount on box 1.
What if I Make a Mistake on a 1099-NEC Form?
If you notice a mistake after submitting a 1099-NEC form, you can file another form with the correct information. Check the box that says “Corrected” at the top of the document.
Tips for Hiring Independent Contractors
When you hire a salaried employee, it’s best to have an onboarding checklist that includes collecting tax documents and creating records for that employee.
We recommend doing the same thing when you hire independent contractors to keep your finances in order and create a smoother tax season.
Collect W-9 forms when you hire a nonemployee and keep records of all payments. This way, you’ll know who you need to file a 1099-NEC for. And you’ll have the information you need to fill out the form.
If you’re still unsure whether or not you need to file a 1099-NEC for a nonemployee, it’s best to file one. There’s no penalty for filing an unnecessary form.
The Bottom Line: Send those Forms Out!
Hiring independent contractors is an excellent way to grow your business without the cost of full-time employees. But it does mean you have extra tax responsibilities at the end of the year.
File a 1099-NEC for each independent contractor you pay $600 or more in a year. And don’t forget to send the form to the contractor too!