What is Form 1099-NEC?
Businesses use IRS Form 1099-NEC to report non-employee compensation of $600 or more, or whenever they withhold federal income taxes. In this article, we'll look at the details of Form 1099-NEC, including its purpose, reporting obligations, and how it affects both businesses and independent contractors.
Key Takeaways
- Businesses should report payments of nonemployee compensation totaling $600 or more on IRS Form 1099-NEC.
- Businesses that withhold federal income taxes from nonemployee payments should also file a 1099-NEC, even if it doesn't reach the $600 threshold.
- If you are a non-incorporated business and another business pays you $600 or more, you should receive Form 1099-NEC by January 31.
- Nonemployee compensation can include fees, benefits, commissions, prizes, and awards for services performed.
What is Form 1099-NEC?
If a business pays an individual nonemployee compensation of $600 or more in a year for work performed, the IRS requires them to file Form 1099-NEC.
If you are self-employed and not incorporated:
- You can expect to receive a 1099-NEC from any business that paid you $600 or more in nonemployee compensation for the current tax year.
- You should receive these forms by January 31 and can use them to assist in preparing your tax return.
What is nonemployee compensation?
The IRS explains that reportable nonemployee compensation meets these four criteria:
- a payment made to someone who isn't your employee
- a payment made for services in the course of your trade or business
- a payment made to an individual, partnership, estate, or in some cases a corporation
- total payment of at least $600 for the year
Businesses should also file Form 1099-NEC if they withhold federal income taxes, even if payments don't meet the $600 threshold.
Nonemployee compensation can include:
- fees
- benefits
- commissions
- prizes and awards for services performed by a nonemployee
- other types of compensation made to a nonemployee for services performed for your trade or business
TurboTax Tip:
You shouldn't see personal payments reported on the 1099-NEC. Instead, your form should only show payments made as compensation related to the company’s trade or business.
What details do I need to know about the 1099-NEC form?
The IRS provides a more detailed list of the types of payments that you would report in Box 1 of the 1099-NEC form.
Some examples include certain payments for:
- professional service fees, like fees to attorneys (including corporations), accountants, architects, contractors, etc.
- fees paid by one professional to another, such as fee-splitting or referral fees
- fees to witnesses or experts in legal cases
- services including for parts or materials used to perform the services
Compensation reported in the 1099-NEC is typically considered self-employment income. So, it may be subject to self-employment taxes.
Who needs to file Form 1099-NEC?
A business that makes payments totaling $600 or more to a nonemployee typically needs to file Form 1099-NEC. Also, any business that withholds federal income tax from nonemployee compensation, regardless of the amount of payment, should file a 1099-NEC.
Businesses should file these forms by January 31, provided they aren't filing an automatic 30-day extension. They may be exempt from the extension rule if they meet certain hardship conditions.
You can download a copy of the 1099-NEC from the IRS website.
What about Form 1099-MISC?
The IRS has redesigned the 1099-MISC to no longer use it for nonemployee compensation. The biggest change was to Box 7, which previously reported nonemployee compensation. It now reports direct sales of $5,000 or more.
What if I receive a 1099-NEC and W-2?
You might get both a 1099-NEC and a W-2 if you earned income from multiple sources. For example, if you’re a full-time worker as well as a freelancer–you may receive both a 1099-NEC and a W-2. If this is your first year receiving both forms, you may have questions about how to proceed with filing.
When you have both a W-2 and a 1099-NEC, you’ll include income from both forms when completing your taxes. The IRS uses income from both of these sources to determine your tax liability. You can include deductions for business expenses as a self-employed person.
Your tax liability will likely change when you earn nonemployee income, so you may need to make estimated tax payments throughout the year. Self-employed income is usually subject to self-employment taxes for Medicare and Social Security. Or, you could increase the withholdings on your W-2 instead to help cover these additional taxes.
What if a business fails to meet the 1099-NEC deadline?
If your business fails to file a 1099-NEC with the IRS on time, you may have to pay a penalty. Remember, the deadline to file a 1099-NEC is January 31.
What if I don’t receive my 1099-NEC in time to file?
Regardless of whether or not you receive a 1099-NEC, you are required to report all of your income on your tax return. So, if a business doesn't send you a 1099-NEC before the tax filing deadline, you should still report all of your nonemployee earnings.
To make it easier, be sure to keep records of all nonemployee income you earn throughout the year. That way, you'll be better prepared for tax season, whether a business sends you a 1099-NEC or not.
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