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Key Takeaways
- When you provide $600 or more in services to a business, that client is usually required to report your earnings by issuing Form 1099-NEC.
- When you receive form 1099-NEC, it typically means you are self-employed and claim your income and deductions on your Schedule C, which you use to calculate your net profits from self-employment.
- As a self-employed person, you're required to report all of your self-employment income. If the amount you receive from your self-employed work totals $400 or more, you will likely need to pay self-employment taxes using Schedule SE.
What Is a 1099-NEC form?
One of the most common reasons you’d receive tax form 1099-NEC (Form 1099-MISC in prior years) is if you're self-employed and did work as an independent contractor during the previous year. The IRS refers to this as “nonemployee compensation.”
- In most circumstances, businesses that you do work for are required to issue Form 1099-NEC when they pay you $600 or more in any year.
- If you receive payments through online payment services such as PayPal, you might also receive form 1099-K.
- As a self-employed person, you're required to report all of your self-employment income regardless of whether you receive a Form 1099-NEC.
The process of filing your taxes with Form 1099-NEC is a little different than if you only had income reported on a W-2. Here's some tips to help you file.
The IRS is gradually phasing in new 1099-K reporting requirements for payments from third-party processors like Venmo and Paypal. In 2021, Congress changed the reporting threshold from over $20,000 in payments and more than 200 transactions to over $600 in payments regardless of the number of transactions. But instead of using the new $600 threshold right away, the IRS applied the previous reporting threshold for the 2022 and 2023 tax years. For the 2024 tax year, the IRS plans to use a $5,000 threshold, regardless of the number of transactions. The tax agency hasn’t announced its plans for after 2024 yet. On the other hand, some states have already started using the $600 threshold for their own reporting requirements.
Who needs a 1099-NEC form?
Form 1099-NEC reports non-employee compensation to businesses or individuals that are paid $600 or more for that tax year.
Examples of people who might receive a 1099-NEC form includes:
- freelancers
- self-employed individuals
- consultants
- vendors
- independent contractors
If you’ve paid anyone non-employee compensation over $600, you’ll need to use Form 1099-NEC to report the payments for services you’ve received.
I received a 1099-NEC. What do I do with it?
If you received this form, here are the steps you need to take:
- Review information: The first step is to review the accuracy of the form. Make sure your name, Social Security number or taxpayer identification number, and the amount of income reported are correct. If you notice any discrepancies, contact the payer to correct the information.
- Report your income: If your 1099-NEC information is correct, the next step is to report your income on your tax return, which may need to be reported on a tax form, such as Schedule C or Schedule E, depending on your business structure.
- Pay taxes: After reporting your income, you’ll be responsible for paying taxes on the income you earned, including your portion of Social Security and Medicare taxes. You may also be required to make estimated tax payments throughout the year. We’ll discuss estimated tax payments in more detail below.
- Maintain records: It’s best practice to keep records of your 1099-NEC forms for future tax purposes and to verify your income. For federal taxes, you should typically keep records for at least three years. For state taxes, it will depend on your state’s tax laws.
How do deductions work with Form 1099-NEC?
One of the nice things about receiving a 1099-NEC rather than a W-2 is you can claim business deductions on your Schedule C, which you use to calculate your net profits from self-employment.
Your deductions have to be for business expenses that the IRS considers ordinary and necessary for your self-employment activities.
- An expense is ordinary if it's incurred by self-employed individuals in a similar field.
- An expense is necessary if it's helpful to you in completing your work. An expense does not have to be essential to be necessary.
For example, the cost of computer software is likely an ordinary and necessary expense for a freelance graphic designer. On the other hand, the cost of hiring a high-end limousine to travel to clients may be helpful, but is not ordinary by tax standards.
When you use Schedule C, you will typically calculate your net profit by:
- Taking your total self-employment income, including those earnings not reported on a 1099-NEC, and
- Subtracting the deductible business expenses you incur.
The final net profit figure is transferred to Form 1040 and combined with your other earnings, income and deductions to calculate your taxable income.
TurboTax Tip:
As a self-employed individual, you need to complete Schedule SE to calculate the Social Security and Medicare taxes you owe, because those taxes are not withheld from your self-employment pay.
What are self-employment taxes?
As a self-employed individual, you have to pay Social Security and Medicare taxes yourself with your tax return rather than having them taken out of a paycheck.
- These taxes are calculated on a Schedule SE, which you attach to your tax return.
- The net profit reported on Schedule C is used to calculate the self-employment taxes on Schedule SE.
- Income from investments and other non-work sources are typically not subject to Social Security and Medicare taxes.
What are estimated tax payments?
One thing you’ll likely notice on your 1099-NEC forms is that your clients don’t typically withhold income tax from your payments like employers do for their employees. This is a pay-as-you-go system where employees typically pay their taxes throughout the year rather than all at once when they file their tax return. As a self-employed person you usually can't wait to pay your taxes all at once either. Instead, you may have to make up to four estimated tax payments to the IRS during the year.
The amount and frequency of your estimated payments depends on:
- how much income you earn
- the tax withheld from other employment income
- the method you choose to calculate your estimated taxes
Use Form 1040-ES to figure out your estimated tax obligations.
When is Form 1099-NEC due?
Similar to most tax forms, businesses need to file Form 1099-NEC on or before January 31. This applies to you if you use the form to report sales that total $5,000 or more. If you can’t meet that deadline, it’s important to note and prepare for penalties.
As a self-employed individual, you’re required to report all income. If your net earnings are over $400, then you’ll have to pay self-employment taxes using Schedule SE . You’ll need to submit the 1099-NEC when you file your taxes, but remember, estimated tax payments are usually required throughout the year.
Where do you send 1099-NEC Forms?
If you've paid for services from a freelancer or contract worker, you may be wondering where to send 1099-NEC Forms. There are a few ways to file 1099-NEC forms, including:
- Online: You can e-file your 1099-NEC Form with the IRS through the Information Returns Intake System (IRIS) Taxpayer Portal. This is a free filing method that allows you to electronically file your 1099-NEC Form, as well as apply for extensions, make amendments, and more.
- Mail: If you prefer to file your 1099-NEC Form by paper, you can send your form to the IRS through the mail. The address you use depends on the location of your business and will either need to be sent to their Austin, Texas; Kansas City, Missouri, or Ogden, Utah processing center. Mailing instructions can be found on the IRS website.
- Third-parties: Using a third-party tax filing software allows you to file your self-employment taxes yourself. A tax expert can also help ensure you apply all relevant deductions and credits to make the most out of your return and meet the deadlines to avoid penalties and fees.
If you’ve received nonemployee compensation and a 1099-NEC for the year, you’ll include that with your taxes in whichever way you choose to file.
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