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What is Form 1099-NEC?

Updated for Tax Year 2022 • December 1, 2022 08:13 AM


OVERVIEW

The IRS has reintroduced Form 1099-NEC as the new way to report self-employment income instead of Form 1099-MISC as traditionally had been used. This was done to help clarify the various filing deadlines for Form 1099-MISC versus the 1099-NEC filing deadline. The 1099-NEC form will be used starting with the 2020 tax year.


For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.


 

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Form 1099-NEC

Beginning with the 2020 tax year, the IRS will require businesses to report nonemployee compensation on the new Form 1099-NEC instead of on Form 1099-MISC. Businesses will use this form if they made payments totaling $600 or more to certain nonemployees, such as an independent contractor.

If you are self-employed:

  • You can expect to receive this new form from a business that paid you $600 or more for nonemployee compensation in tax year 2020 or later.
  • You should receive these forms by January 31 each year and use them to prepare your tax return.

Why did the IRS reintroduce 1099-NEC?

Before its reintroduction, the last time form 1099-NEC was used was back in 1982. Since then, prior to tax year 2020, businesses typically filed Form 1099-MISC to report payments totaling $600 or more to a nonemployee for certain payments from a trade or business. These payments generally represent nonemployee compensation and, up until now, would typically appear in box 7 of 1099-MISC.

In order to help clarify the separate the various filing deadlines when reporting different types of payments on Form 1099-MISC, the IRS decided to reintroduce Form 1099-NEC which has a single filing deadline for all payments that use the form.

What is nonemployee compensation?

The IRS explains that, in general, you must report payments you make if they meet the following four conditions:

  1. The payment is made to someone who is not your employee
  2. The payment is made for services in the course of your trade or business
  3. The payment is made to an individual, partnership, estate, or in some cases a corporation
  4. The payment total is at least $600 for the year

Additionally, businesses will need to file Form 1099-NEC if the business has withheld any federal income tax under the backup withholding rules regardless of the amount of payments for the year to the nonemployee.

Nonemployee compensation can include:

  • Fees
  • Benefits
  • Commissions
  • Prizes and awards for services performed by a nonemployee
  • Other forms of compensation for services performed for your trade or business by an individual who is not your employee

What details do I need to know about the 1099-NEC form update?

Self-employed individuals should not see personal payments made to them during the year on the new form. Instead, your form should only report payments made as compensation related to the company’s trade or business.

  • The nonemployee compensation reported in Box 1 of Form 1099-NEC is generally reported as self-employment income and likely subject self-employment tax.
  • Payments to individuals that are not reportable on the 1099-NEC form, would typically be reported on Form 1099-MISC.

The IRS provides a more comprehensive list of the types of payments that would be reported in Box 1.

Some examples include:

  • Commissions paid to nonemployee salespeople that are subject to repayment but not repaid during the year
  • Professional service fees, such as fees to attorneys (including corporations), accountants, architects, contractors, etc.
  • Fees paid by one professional to another, such as fee-splitting or referral fees
  • Payments by attorneys to witnesses or experts in legal adjudication
  • Payment for services, including payments for parts or materials used to perform the services

Who needs to file Form 1099-NEC?

Any business that makes nonemployee compensation payments totaling $600 or more to at least one payee or withholds federal income tax from a nonemployee’s payment, will now use this revamped form to report those payments and withholding.

Generally, payers need to file these forms by January 31 and have no automatic 30-day extensions to file unless the business meets certain hardship conditions.

What about Form 1099-MISC?

Because the IRS removed reporting for nonemployee compensation from Form 1099-MISC for tax year 2020 and onward, the IRS redesigned that form as well.

  • The biggest adjustment comes to Box 7, which previously reported nonemployee compensation but now reports direct sales of $5,000 or more.
  • Other information reported on the form will now show in renumbered boxes.

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