A 1099-NEC form is just one of 18 different 1099 forms issued by the IRS to report information about income.
The 1099-NEC form is used by businesses to report payments they make to non-employees (such as independent contractors or sole proprietors) who have provided a service during the tax year. It’s not used for the business’s employees.
Before 2020, this information was reported on a 1099-MISC form, but the 1099-NEC form has been reintroduced and is now used for this type of information. You can find more information about what should be reported on the 1099-MISC form on the IRS website.
The business making the payments (the payer) and those receiving them (the payee) need to know about 1099-NEC forms and what they should do with them. We look first at a business’s responsibilities.
Who should complete a 1099-NEC?
Your business will have to complete a 1099-NEC form for each payee if all of these payment conditions are met:
- Payment is made to someone who is not your employee
- Payment is made for services in the course of your trade or business
- Payment is made to an individual or single-member LLC owned by an individual; a partnership or an LLC taxed as a partnership; or an estate
- The payments total $600 or more for the year
The payments can take the form of cash or non-cash benefits (such as trade).
You don’t need to complete a 1099-NEC if you’ve made the payments by credit or debit card or through a third party, like PayPal. The financial institution you used reports these payments instead.
What do you have to do as the payer?
As the payer, you have four key tasks:
- Before you pay them, request a completed W-9 form, so you have their taxpayer identification number.
- At the end of the calendar year, fill out the 1099-NEC forms and, if you’re sending in paper forms, also complete a 1096 form, which is like a cover letter for all the 1099 forms you submit.
- File these forms with the IRS (and state tax department if applicable) by January 31* of the following year, either electronically or by mail.
- Send a copy of the 1099-NEC form to the non-employee before January 31*.
*The deadline can change slightly from year to year if this date falls on a holiday or a weekend. The deadline would then be the next business day. Note that there are penalties for late filing.
Where do you get a 1099-NEC form?
You can use an e-filing service provider to complete your forms and file online. Or purchase paper copies from office supply stores. You can also place an online order for paper copies of the form from the IRS website.
How do you fill in a 1099-NEC form?
The form has five key parts:
- Payer's information: name, address and taxpayer identification number
- Recipient's information: name, address and taxpayer identification number from their W-9 form
- Non-employee compensation amount: the total payments for the past calendar year
- Federal income tax withheld
- State information, when applicable
How do you file a 1099-NEC form?
The easiest way is to file electronically. E-filing service providers can be found online and may charge a small fee to file the forms for you.
Or you can file paper forms by mail. If you’re filing by mail, you’ll also need to complete and send a Form 1096.
You can also submit the 1099-NEC to the IRS online by registering for and using its Filing Information Returns Electronically (FIRE) system.
What do you need to do if you are the payee?
You should receive a 1099-NEC form from each business client that’s paid you at least $600 during the tax year. However, if you’ve been paid by credit or debit card or through another third party, like PayPal, you won’t need to worry about getting a 1099-NEC for those payments.
The client that paid you fills out the 1099-NEC form and sends you a copy by January 31 of the following tax year. If you haven’t received it by then, get in contact with them and let them know.
The 1099-NEC form is just for your information when reporting your income – you don’t need to send it to the IRS. However, you do need to report all your income, whether you receive a 1099 or not.
Take the example of Joe, who is a freelance photographer. During the year he worked for three months as a contractor for a magazine and then four months for a wedding photography business. Both businesses reported the income he was paid on 1099-NEC forms and sent copies to Joe, and also filed them with the IRS. When Joe prepared his tax return, he reported this income, along with other income he’d received during the year, and paid income tax on it.
Where else can you find help about 1099-NEC forms?
If you’re unsure whether you need to submit a 1099-NEC or whether you should receive one, check with an accountant or look for more information on the IRS website.
Disclaimer: Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.