Starting with the 2021 calendar year comes changes to business owners' taxes. The IRS form 1099-NEC is how employers will report nonemployee compensation, instead of reporting these payments in box 7 on the previous version of Form 1099-MISC. Form 1099-MISC still exists, but it is just to list miscellaneous income, like prizes and awards or medical payments.
A 1099-NEC is needed to report payments exceeding $600 for work done by vendors or subcontractors who do not qualify to be employees.
The 1099-NEC Form is for employers to document non-employee compensation for independent contractors and freelancers. Independent contractors must receive Copy B of the 1099-NEC in order to include it with their tax returns. Employers, or payers, are required to file Copy A of the Form 1099-NEC with the IRS by January 31st.
These conditions must be met to report payment for non-employee compensation:
The payment made are to someone (recipient) other than an employee, such as an independent contractor or freelancer who completes a temporary assignment.
The payment must be made for projects and services in the course of your (payer) trade or business.
The payments made to the payee (recipient) must be at least $600 during the year.
As aforementioned, payers are required to provide a Form 1099-NEC to the payee and file it with the IRS by January 31st of the following year.
Those who need to send out a 1099-NEC can acquire a free fillable form by navigating the website of the IRS, which is located at www.irs.gov.
Once you've received your copy of the form, you'll want to familiarize yourself with the various boxes that must be completed. When you fill out a Form 1099-NEC you will need:
Payer's and recipient's information, including name, address, and employee identification ID's/taxpayer ID's
Amounts paid to the recipient as a part of nonemployee compensation
State taxes withheld (if any) and in which states
Additional details (not common) such as “Account number” which identifies each individual 1099-NEC a payer is reporting, and “direct sales” information if the particular scenario involves direct sales between the payer and payee
Additional details for each section can be found below.
Basic information such as payer's name and place of business should be listed in the large boxes on the top left.
Under that large box will be two smaller fields: one on the left for the payer's taxpayer identification number (TIN) and one on the right for the recipient's taxpayer identification number (for individuals, this is the same thing as their social security number).
Recipient's name and address information will be requested below the above boxes.
Next, you'll see the account number field. It is located on the left side of the form, and it does not have its Box number. This is an optional field that is only used by the payer if they have multiple 1099-NEC’s for a single recipient. For example, if a payer need to provide two different 1099-NEC’s for separate services, each 1099-NEC will need a different account number in order to separate the two.
This section is generally used to help payers stay organized. However, if this section is filled out, and corrections will need to be made in the event of an error - this account information will need to be used to identify which 1099-NEC the payer is trying to correct.
Enter amounts of $600+ made to nonemployees. However, do not use the 1099-NEC to report gross proceeds to an attorney; use the 1099-MISC instead. Additionally, do not use the 1099-NEC to report payments of rent to real estate agents or property managers; use the 1099-MISC instead. Lastly, do not use the 1099-NEC to report cash payments for the purchase of fish for resale purposes; use the 1099-MISC instead.
Check this box if you made direct sales of $5000+ of consumer products to a recipient on a buy-sell, deposit-commission, or other commission basis anywhere other than a permanent retail establishment.
This is only checked if the arrangement between the payer and recipient involves resale goods. For example, if a business owner sold $5000 worth of pencils to a contractor, in which the contractor then sold to customers as a part of their services, this box would need to be checked.
List the amount of federal income tax withheld if any. When preparing tax forms for non-employees, federal income tax is often not withheld unless there is an order to do so by the court or the IRS.
This is not used, but the space is reserved/saved by the IRS to possibly use in the future if there are changes made to this form.
Boxes 5, 6, and 7 are optional and are used to document state tax withheld from the non-employee compensation for up to two states.
Box 5 outlines the dollar amounts withheld.
Box 6 identifies the state via the two letter abbreviation and the payer's state ID number if applicable.
Box 7 outlines the amount of income paid in the respective state which nonemployee compensation was provided. In most case, if the services provided by the nonemployee reside in one state, there will be one state identified in boxes 5 and 6, and the amount listed in box 7 should equal to the number in box 1. If the services provided span across two states, box 7 should online which portion of the total amount paid to the nonemployee should attribute to state 1 vs state 2.
This document should not be confused with a W-2 form or with the 1099-MISC. The 1099-NEC is used to pay freelancers and independent contractors. This form is specifically for reporting payments to non-employees.
Completing and filing this tax form is easy. Simply fill in the appropriate boxes according to the definitions provided in the form's instructions. Remember that some fields are optional. Once the form is complete, distribute the copies of the 1099-NEC to the appropriate parties. Copy A will need to be filed with the IRS by the deadline (usually January 31st). Copy 1 will need to be filed with the appropriate state taxing authority, if applicable. Copy B is to be provided to the nonemployee by the deadline (usually January 31st). Copy C is for safekeeping for the payer’s records.
The deadline for the 1099-NEC is the same regardless of whether you file by mail or electronically. This is the same deadline for when the payer will need to provide the recipient copy.
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