Hiring freelancers, independent contractors, and others to provide services, is a common practice for small business owners. But do you know that payments to these non-employees must be reported for federal tax purposes on a form issued by the IRS? This form is known as Form 1099 NEC. Read on to know all the relevant details about Form 1099-NEC.
What is Form-1099-NEC?
Form-1099-NEC is a tax form that is used to report non-employee compensation given by a company or business purposes. Non-employees include freelancers, gig workers, independent contractors, accountants, attorneys, and the list goes on.
Why did the IRS relaunch Form 1099-NEC?
Earlier 1099-NEC was used in 1982 before its relaunch in the tax year 2020. Since then, businesses were filing Form 1099-MISC to report payments worth $600 or more to a non-employee for certain payments from the trade or business. These payments act as non-employee compensation and, up until now, would typically appear in box 7 of 1099-MISC.
To segregate filing deadlines while reporting different types of payments on Form 1099-MISC, Form 1099-NEC was reintroduced by the IRS. This new form has a single filing deadline for all the payments that use the form.
Who needs to file Form 1099-NEC?
You need to file Form-1099-NEC if all of the following conditions are met:
- You made the payment to someone other than your employee
- The payment was done for services in the course of your trade or service
- The payment was done to an estate, individual, partnership, or corporation
- You made the payment to the payee at least $600 or more for the year
When is Form 1099-NEC due?
Form-1099-NEC is due by January 31 every year, irrespective of filing methods, be it paper or electronic filing. In case, the due date falls on any Federal holidays or weekends, then the next business date will become the due date.
Back-up Withholding and Form-1099-NEC
Back-up withholding refers to the situations when the individuals or businesses paying the taxpayer don’t withhold taxes from certain payments. There are however conditions where the taxpayer is required to withhold a specific percentage of tax in order to make sure that the IRS gets the tax due on that income. It is usually required by the IRS in case the taxpayer doesn’t provide a correct taxpayer ID number on their W-9 form at hire. In such cases, the IRS provides a backup withholding order to the taxpayer ensuring that they withhold federal income taxes from the payee at 24%. This withholding order remains in effect until it's removed by the IRS.
Where to get Form 1099-NEC?
There are a multitude of ways through which you can get Form 1099-NEC:
- You can get Form 1099-NEC through business tax preparation software
- Form 1099-NEC can be taken directly from the IRS
- You can get Form 1099-NEC from your business accounting program
- Even an accountant or CPA who prepares business taxes can get you this form
Note that you cannot download Form 1099- NEC from the internet because Copy A is printed in a special type of red ink that needs to be scannable.
How To Fill Out and Read Form 1099-NEC?
Form 1099-NEC consists of five parts:
- Payer's information
- Recipient's information
- Non-employee compensation amount
- Federal income tax withheld
- State information
Under the payer and payee information section, you will have to enter their name, address, and taxpayer ID.
Box 1: In this box, the total amount of non-employee compensation paid during the year is reported.
Box 2: You need to check this box in case you sold $5,000 or more for resale or other purposes. Remember that the total amount is not reported on this form, but it gets included on your small business tax return (usually Schedule C).
Box 4: Here, any federal income tax withheld from a backup withholding notice is reported.
Box 5: It displays any state tax withheld
Box 6: It is a specific identification number for each state
Box 7: The total state income for the non-employee for the year.
How To File Form 1099-NEC?
You need to file the 1099-NEC forms with the IRS before January 31 either through paper or electronic filing.
If you are filing through paper, then get it printed and send it to the IRS at the address depending on the state you are living in.
You can also file electronically, using the IRS Filing Information Returns (FIRE) system. If you are filing 250 or more 1099-NEC forms, then you cannot send paper forms; you will have to file electronically.
What are the penalties for late filing?
In case you miss the deadline, you will have to pay a penalty depending on how late the payment is. Here’s a look at the penalties:
- If you file within 30 days, you will have to pay a penalty of $50
- If you file more than 30 days late but before August 1, then you will be charged a penalty of $100
- If you file on or after August 1, then you will be charged $260
The penalty amount depends upon when you file the correct information return. In case, you are not able to file on time, then there is an option to request an extension by submitting Form 8809 to the IRS. However, you will still have to supply the 1099-NEC forms by January 31.
Which copies of Form 1099-NEC go to the recipient?
You will have a plethora of copies, once you complete a 1099-NEC form. You need to file Copy A with the IRS, either in paper form or online. Then you will have to provide Copy 1 to the recipient for filing with their state tax department (in case their state requires state income tax).
Copy B is provided to the recipient to keep his records.
In case you file Copy A electronically, then you will still have to send paper copies of Copy 1 and Copy B to the recipient.
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- Form 1099-NEC is a tax form that is used to report non-employee compensation given by a company or business purposes
- Form 1099-NEC was relaunched in the tax year 2020, earlier it was started in 1982. it was relaunched to eliminate the clash of deadlines in filing form 1099-MISC for different types of payment
- There are certain conditions that need to be met in order to file Form 1099-NEC
- Form-1099-NEC is due by January 31 every year, irrespective of filing methods, be it paper or electronic filing
- Back-up withholding refers to the situations when the individuals or businesses paying the taxpayer don’t withhold taxes from certain payments
- You can get Form 1099-NEC through various ways, be it through business tax preparation software, business accounting program, directly from the IRS, or even through an accountant or CPA who prepares business taxes
- Form 1099-NEC consists of five parts: payer's information, recipient's information, non-employee compensation amount, federal income tax withheld, and state information
- You need to file the 1099-NEC forms with the IRS before January 31 either through paper or electronic filing.
- In case you miss the deadline, you will have to pay a penalty depending on how late the payment is