With over 60 million people working as freelancers in the USA, you might have to deal with freelancers frequently. So, if you pay freelancers for their work, the IRS has proposed a modification that will almost certainly affect your business.
Beginning with the 2020 tax year, rather than declaring non-employee remuneration on Form 1099-MISC, prepare and submit Form 1099-NEC. It's a minor change, but you might face fines if you submit the incorrect form or don't provide your contractors with the statement.
With that said, this article will help you deal with the ins and outs of Form 1099-NEC. We will first understand Form 1099-NEC and then look at various other aspects.
Here are the things that we will cover in this article:
- What Is Form 1099-NEC: Nonemployee Compensation?
- Non-employee compensation–what does that mean?
- Who Can File Form 1099-NEC?
- What’s included on Form 1099-NEC?
- How to File Form 1099-NEC?
- What else should you know about filing 1099-NEC?
What Is Form 1099-NEC: Nonemployee Compensation?
For the first time in this tax season, many self-employed individuals will get Form 1099-NEC in the mail. The 1099-NEC is the new form for reporting non-employee earnings, sometimes known as pay from independent contractor work. A freelance job like driving for DoorDash or Uber is an example.
Previously, businesses reported this revenue on Form 1099-MISC. If you were an independent contractor in the past and got that form, you will now receive Form 1099-NEC instead. Aside from the form's name, little else has changed for form receivers.
Before we proceed further, let's understand what non-employee compensation is.
Non-employee compensation–What does that mean?
Freelance contract workers who are not employees get non-employee remuneration. If that distinction is unfamiliar, keep reading to understand the contrast between employee and independent contractor job status.
Here's the distinction in terms of taxation:
- Employees: If you are an employee, the IRS will deduct many payroll taxes from your payment. Employees benefit from this withholding since it allows them to pay their taxes automatically as they go. Your employer will provide you with a Form W-2 during tax season.
- Independent Contractors: As for freelancers, the IRS will not deduct payroll taxes from your check. Paying as you go is now your headache. You'll get Form 1099-NEC at tax time, which will reflect your overall for the year.
To prevent an underpayment fine, pay taxes as you go rather than delay until tax season. You'll do it in quarterly installments rather than doing it paycheck by paycheck. You'll submit a tax bill to the IRS and any appropriate state and municipal taxation authorities four times.
So, now you know what non-employee compensation is. But, first, let's look at who can file the form 1099-NEC.
Who Can File Form 1099-NEC?
If you compensated anyone at least $600 throughout the year, which fits the following conditions, you must submit Form 1099-NEC:
- They are not one of your employees.
- You paid for services rendered during your business; this was not a personal payment.
- They are an individual, a partnership, or estates. Payments made to companies will also need to be included in select circumstances.
These payouts might include commissions, fees, rewards, and service awards. If you previously filed Form 1099-MISC for someone you paid for business services, you will now file Form 1099-NEC instead this year.
There are a few exceptions to this rule. You will not include any employee payments provided to employees, such as salary or business travel allowances. These payments may cause the use of Form W-2.
Other exclusions are:
- Most corporations, both S-corporations, and C-corporations, get payments. However, payments to companies would only be a part of it if they were for cash purchases, attorney's fees, or payments made by a federal executive agency.
- Payments for products, telegrams, phone calls, freight, storage, and other related services.
- Rent paid to property managers or real estate brokers.
- Contributions to a tax-exempt organization.
Next, let’s look at the information that you must include on Form 1099-NEC.
What’s included on Form 1099-NEC?
Form 1099-NEC, like form 1099-MISC, is a relatively short form with many copies. Form 1099-NEC contains the following information:
- Information about the payer includes identity, residence, and taxpayer identification number (TIN)
- Information on the recipient, such as name, address, and TIN
- The entire amount is paid as non-employee remuneration
- Withheld federal and state income taxes
The simplest approach to getting personal information from a non-employee is to have them complete a W-9 form. With it plus the details from your financial statements, you should be able to complete the 1099-NEC.
There are several copies of the form that you must send. These are the copies:
- Copy A to the IRS
- Copy 1 to your state's tax department
- Copy B to the addressee
- Copy 2 also to the addressee
- Copy C is for your tax records
Now, you must have got a basic idea of what to include on Form 1099-NEC. With that, let's look at how to file Form 1099-NEC.
How to File Form 1099-NEC?
Filing form 1099-NEC is simple. The following are the five major sections:
- Information about the payer: This includes information about your company
- The information of the receiver: This includes information about your contractor, non-employee, or freelancer
- NEC amount: This will be more than $600, but you must also submit Form 1099-NEC to anybody for whom you withheld federal income tax under backup withholding rules, even if the amount is less than $600
- Withheld federal income tax: This would typically be $0.0 unless you get a backup withholding order from the non-employee
- State-specific data
The most important box to look at is Box 1, where you'll enter the full amount you paid the contractor in the previous year.
As you can see, filling out Form 1099-NEC is straightforward. Let's look at some more crucial information that you should know about filing a 1099-NEC.
What else should you know about filing a 1099-NEC?
Calculating and paying self-employment taxes is another stage. As an independent contractor, you pay Social Security and Medicare taxes. Schedule SE will calculate your self-employment taxes. In addition, you may claim the qualifying business income deduction as an independent contractor. This updated deduction allows you to deduct 20% of your pass-through revenue.
And that's everything that you should know about 1099-NEC. Now, let's look at some of the most frequently asked questions regarding form 1099-NEC.
Frequently Asked Questions
When is the 1099-NEC form due?
To file a 1099-NEC with the IRS, you must do so by January 31. In addition, recipient copies must be postmarked by January 31.
Is it necessary to track credit card payments to merchants for income?
Even if you paid the receiver more than $600 last year, you are not obligated to issue a 1099-NEC if you paid the contractor with a credit card or other online payment provider. For electronic payments, the payment processor will take care of any mandatory reporting.
What exactly is the W-9 Form?
A signed W-9 shows that the signer is giving correct information about their company type, federal tax classification, and TIN. A vendor may claim that they are incorporated and do not need to produce a W-9 form or get 1099 at the end of the year, but this is not true.
With that, we have reached the end of the article. Let’s take a quick summary of everything we have covered in this article.
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- The new form for reporting non-employee earnings, sometimes known as compensation from independent contractor employment, is the 1099-NEC
- Businesses formerly reported this revenue on Form 1099-MISC. If you were formerly an independent contractor and received that form, you will now receive Form 1099-NEC instead
- Non-employee pay is paid to freelance contract workers who are not employees
- Pay your taxes as you go rather than waiting until tax season to avoid an underpayment penalty
- Businesses must file a Form 1099-NEC for each non-employee individual to whom they paid $600 or more throughout the fiscal year
- Commissions, fees, prizes, and service awards are examples of payments
- Form 1099-NEC includes payer and receiver data, paid amount, and federal and state taxes deducted
- Filing form 1099-NEC is simple. The following are the five major sections: Information about the payer, the information from the receiver, NEC amount, Federal income tax withheld, State-specific data
- The most important box to look at is Box 1, where you'll enter the full amount you paid the contractor in the previous year