Hiring freelance workers and independent contractors is common practice for many businesses. While these workers are not permanent employees, your business is still required to file an IRS 1099 Form to report payments you made to them.
Much like your business is required to file Form W-2 for its employees, you may be required to file Form 1099-NEC to report the non-employee compensation to the IRS. Keep reading for a helpful overview of Form 1099-NEC.
Also read: How to File Revised Income Tax Returns
What is Form 1099-NEC?
Whether you’ve started a new business or just started hiring independent contractors, it’s time to get familiar with Form 1099-NEC for non-employee compensation. Form 1099-NEC is an informational return that is filed with the IRS to report all payments of $600 or more made to non-employees. Non-employees are workers that are not classified as W-2 employees, this includes independent contractors, freelancers, gig workers, and anyone else that is self-employed.
The non-employee payments include:
- Other forms of compensation
Difference between Non-employee Compensation and Regular Employee Wages
In general, non-employee compensation is different from regular wages paid to a W-2 employee. When you pay a regular W-2 employee, you are responsible for withholding income and payroll taxes. At the end of each year, you must issue Form W-2 to each employee showing the wages and other taxes withheld from their paycheck.
However, when you hire an independent contractor, you are not required to withhold any income or payroll taxes from their paycheck. Instead of Form W-2, you should file Form 1099-NEC, which reports the non-employee payments. The non-employee is responsible for using Form 1099-NEC to report their own annual income to the IRS.
Why did the IRS Reintroduce Form 1099-NEC?
Form 1099-NEC is a relatively new form that was reintroduced for the 2020 tax year. However, it was first created back in 1982, so why did the IRS decide to re-introduce this form?
IRS Form 1099-NEC was brought back to resolve the confusion regarding the deadline to file Form 1099-MISC. Before 2015, the deadline to file Form 1099-MISC for both non-employee compensation and other miscellaneous income was February 28th. The new Protecting Americans from Tax Hikes Act changed the deadline to report non-employee compensation on MISC to January 31.
Because of the different deadlines, businesses began to file separate Forms 1099-MISC, which resulted in more confusion for taxpayers and the IRS. In order to eliminate this confusion, Form 1099-NEC was reintroduced.
Form 1099-NEC doesn’t replace Form 1099-MISC. The non-employee compensation that used to be reported in Box 7 of Form 1099-MISC is now reported in Box 1 of Form 1099-NEC.
Form 1099-NEC vs Form 1099-MISC
|Deadline for Recipient Copy
|Deadline for IRS Filing
|Report payments made to non-employees (freelancers, Gig workers, and other self-employed individuals) in a calendar year.
|January 31, 2023
|January 31, 2023
|Reports miscellaneous types of income such as rents, prices, and awards.
|January 31, 2023
|Paper filing: February 28, 2023
E-filing: March 31, 2023
Who is Required to File Form 1099-NEC?
Any business that paid wages or compensation of $600 or more to a non-employee for services rendered during the calendar year is required to file Tax Form 1099-NEC with the IRS.
In general, your business is required to file Form 1099-NEC under the following conditions:
- If the payment is made to an employee who doesn’t fall under your regular W-2 employee category.
- If the payment is made to a non-employee for the services offered in the course of business or trade.
- If the payment is made to an individual, partnership, or estate.
- If the payment made to the payee during the calendar year for their services was at least $600.
- If the business withheld any federal income under the backup withholding rule, even if it is less than $600.
However, there are some exceptions to filing Form 1099-NEC.
- If you pay less than $600 in wages or compensation to a non-employee.
- If the payment is made to a corporation and the limited liability company is taxed as a corporation.
- If the payment is made using a credit card, debit card, or third-party network (PayPal, Venmo, etc.).
Wondering why? This is because the transaction made through the payment processor should be reported on Form 1099-K.
How to Fill out Form 1099-NEC?
Form 1099-NEC can be downloaded from the IRS website and you can complete and mail it to the IRS, or you can choose to e-file Form 1099-NEC. E-filing is the more efficient option, just make sure that you choose a reputable, IRS-authorized e-file provider. If you are filing multiple forms, it’s definitely best to choose an e-filing provider.
That being said, let’s address another major topic, understanding and completing the boxes on Form 1099-NEC.
The form has seven boxes, and each box has its own requirements. Before filling out the boxes, you are required to provide basic information, such as
Payer information: Business name, Address, and EIN.
Recipient Information: Recipient name, Address, and TIN.
1. In this box, businesses are required to fill out the non-employee compensation paid during the prior year.
2. Check the box if the business sold $5,000 or more for resale or other purposes.
3. Businesses should report any federal income tax withheld under the backup withholding rule.
4. Businesses should report any state taxes withheld.
5. Enter the specific state identification number.
6. Report the total state income for the non-employee
When is the deadline to file Form 1099-NEC?
Like other 1099 online forms, the IRS requires the businesses that made payments to their non-employees to submit a copy of Form 1099-NEC to the recipient and another copy to the IRS on or before January 31.
In the event that the deadline on January 31 falls on a weekend or a federal holiday, the due date is moved to the next business day.
What are the Late-filing Penalties for Form 1099-NEC?
In the event that businesses fail to submit or provide correct information to the IRS before the deadline, they are subject to IRS penalties. The penalties vary depending on when the business issues the form. Here are the penalty amounts provided by the IRS.
The Forms were filed 30 days late: $50 per form up to a maximum penalty of $206,000.
Those Forms filed by August: $110 per form up to a maximum penalty of $588,500.
Forms filed after August: $290 per form up to a maximum penalty of $1,177,500.
*If the IRS finds that a business has intentionally disregarded its filing obligations, they can be changed to $580 per form and No Maximum. Please note that only the IRS can levy penalties and the numbers above are based on IRS information.
Kindly note that you can’t request an extension for Form 1099-NEC like other tax forms.
Does the IRS waive the Late-filing Penalties?
The IRS might agree to waive your penalties if your business can prove a reasonable cause. The cause could be a natural disaster at your business location, an illness, or the death of a family member.
If the IRS finds the cause reasonable, you may get a 45-day extension to dispute penalties. Again, only the IRS can advise on penalties.
Key Takeaways about Form 1099-NEC
Whether you are a small or large business, filing Form 1099-NEC is extremely important. Falling to meet the deadline might result in IRS penalties. It is advised that you file your forms on the required deadline to avoid any last-minute chaos.
Meeting your deadline isn’t always easy, especially if you are mailing paper forms to the IRS and mailing your own recipient copies. A great time-saving solution for you could be an IRS-authorized e-file provider. E-filing is a much smoother process, as this is the preferred filing method of the IRS.