If you’re a freelancer or contractor, or if you run a business that hires those types of workers, you need to be familiar with Form 1099-NEC. However, given that this form was only introduced in 2020, many people are confused about what purpose it serves and how to fill it in. This guide will cover all you need to know, with detailed 1099-NEC instructions.
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Before we look at exactly how to fill in Form 1099-NEC, it’s important to understand what it is and why it’s used. Here’s a quick primer for the uninitiated: Form 1099-NEC is the Internal Revenue Service (IRS) form that is used by businesses for reporting payments made to freelancers, contractors, sole proprietors, and self-employed individuals.
This form actually existed back in the early 80s, but was phased out in favor of 1099-MISC. For many years, 1099-MISC was the document that any business would use when it came to reporting compensation for contractors and so on. However, in 2020, the IRS made the decision to bring back Form 1099-NEC.
This was done to simplify matters, as many people found the filing deadlines of 1099-MISC to be confusing. By reintroducing Form 1099-NEC and having two separate tax forms for nonemployee compensation and miscellaneous compensation, the IRS hoped to dispel that confusion. It’s also worth noting that there are various other types of 1099 forms, each with its own purpose.
Put simply, the whole point of Form 1099-NEC is for reporting nonemployee compensation (that’s what the NEC stands for). If the concept of “nonemployee compensation” sounds vague to you, it basically refers to money paid to workers who aren’t technically employed by a business – in other words, freelancers and independent contractors.
When you’re an employee of a business, taxes tend to be relatively simple. The employer takes federal and state taxes (payroll taxes) directly out of your paycheck, effectively allowing you to simply pay your taxes automatically. But when you’re a contractor or freelancer, it’s a different story, as the businesses you work for won’t withhold any payroll tax from you.
Instead, it’s up to you to fill in the forms and pay the money owed. And that’s basically why Form 1099-NEX exists; it shows the payments that you’ve received over the course of the year for your freelance or contract work. This makes it easier for any self-employed person to track their income, as well as for businesses to log the amounts paid out to contractors.
If your business hires workers who aren’t technically employees, such as freelancers or contractors, then you’ll most likely need to complete Form 1099-NEC. In fact, you’ll need to complete multiple copies of the form for each and every person you paid at least $600 to over the course of the year. If you do a lot of work with contractors, that can add up to quite a lot of forms.
The freelancers and contractors themselves will also receive copies of the relevant 1099-NEC forms filed by the businesses that they worked for. Those copies can be kept for the freelancers’ own records and tax reports. If you’ve done some freelance/contract work for a value of $600 or more, then expect to receive a 1099-NEC form.
More specifically, here are the main IRS conditions that come into play when deciding whether or not a 1099-NEC form is needed.
For payments under $600, there’s no need to file Form 1099-NEC. It only applies in cases where the total payment to a contractor, freelancer, or self-employed person meets or exceeds $600.
Form 1099-NEC is also only needed for payments that have been made for business services, not personal ones. Let’s say you hire a contractor to do some work on your office’s staff room, and you later hire the same person to do renovations at your home. The office job counts as a business service, so needs a 1099-NEC, but the home job won’t.
If you have a contract or working agreement with an LLC sole proprietorship, you’ll need to fill in an 1099-NEC. You can find out if a business counts as an LLC sole proprietorship by consulting its W-9 form.
There are even cases where you’ll need to fill out a Form 1099-NEC when working with a corporation. For most S and C-Corps, there’s no need to worry about these forms. But there are a few notable exceptions:
Note that some of these payments (attorney fees, medical fees, etc.) also fall under the category of miscellaneous payments and need to be reported on 1099-MISC, which also covers royalties, awards, prizes, rents, crop insurance proceeds, fishing boat proceeds, and more. If you’re unsure about anything, it’s worth looking up the details of Form 1099-MISC to understand how it differs to 1099-NEC.
We’ve seen the basics of the Form 1099-NEC. Now, let’s take a look at the key instructions you’ll need to follow to fill it all in correctly, starting from the top of the page and progressing through all of the key sections and boxes.
First, note that just like other 1099 forms, the top of 1099-NEC is marked in red and shouldn’t be filled in by the payer. Instead, leave that section blank for the IRS to handle. Only fill in and focus on the sections in black.
The first section of the form (the box in the top left) asks you to enter some details about yourself (the payer). This includes name, address, and telephone number.
You’ll then see two boxes underneath that where you can fill in your TIN (taxpayer identification number) and the recipient’s TIN.
Note that if you don’t know the recipient’s TIN, you should be able to find it on their W-9 form. Alternatively, you can contact them to ask for the TIN – otherwise, if you try filing without the TIN, you may receive a CP2100A notice from the IRS. This is similar to how an SS4 form may be issued in cases where businesses do not supply their EIN (Employer Identification Number).
Continuing down the left side of the form, you’ll see another large box that needs to be filled in with all of the recipient’s details. This includes their name, street address, city, and ZIP code. Finally, there’s one more box in the left column, where you’ll need to enter the recipient’s account number.
Next, in the right side of the form, you’ll see a series of numbered boxes.
Box 1 is where you enter the total amount of nonemployee compensation. Remember, this only applies to all payments over $600, and it only applies for payments towards business services from freelancers, contractors, and self-employed individuals.
Box 2 should be marked with an “X” if you wish to report any sales totaling $5,000 or more of consumer products that are intended for resale purposes, either on a buy-sell, deposit-commission, or other basis.
Box 3 is currently reserved for future use, according to the use, and should be greyed out on your form. It doesn’t need to be filled with any amounts or information at this time, but the IRS could update the rules in the future to make Box 3 relevant.
Box 4 is for federal income tax withheld. This applies if you happen to have withheld any federal income tax from your contractor or freelancer. Usually, you won’t have done this, so you probably won’t need to worry about this box either. But there are cases in which contractor wages could be subject to backup withholding (such as if they fail to provide a correct TIN). The IRS should let you know about this beforehand, so if you don’t hear anything from them, don’t worry about Box 4.
Box 5 is similar to No. 4. It’s for withheld state tax. If you withheld any state income tax from your freelancer or contractor payee, you’ll have to report it here. Again, most payers won’t need to worry about this.
Note that if you’re unsure about filling in any of the boxes or what they refer to, there are several options available to you. You can consult the IRS’s official instructions, call the IRS directly for help, or seek advice from an accountant or other financial professional.
Usually, the income that needs reporting will be made clear to you by the IRS. Check their platform to ensure you have all the data right.
In Box 6, you can write in the abbreviated name of your state, as well as its ID number. Note that you only need to do so if you’ve entered a value in Box 5. If there’s nothing in Box 5, you can leave this box (and Box 7) blank. Also note that boxes 5 through 7 are only for your convenience and records, not for the IRS.
Finally, we have Box 7, which is used for the total amount of the state payment. Again, this is directly related to boxes 5 and 6. If you have left those boxes blank, you can go ahead and ignore Box 7 entirely.
When it comes to any kind of tax form, it’s important to be aware of the relevant deadlines and make sure you file on time to avoid possible late fees and penalties.
In the case of Form 1099-NEC, the deadline is January 31. This is the absolute latest date by which the form should be completed and filed with the IRS. In some rare cases – like when January 31 falls on a holiday – the date may be pushed back a day to February 1, but in the vast majority of years, Jan 31 is the date to remember. By that day, you need to send all relevant copies of the form to the IRS, as well as the Copy B and Copy 2 versions to the contractors or nonemployees you filled out the forms for.
Also, note that this date applies to both manual (paper) filing as well as electronic filing (e-filing). So, no matter which method of filing you choose, the due dates are always the same. For 2024, that date is January 31, 2024.
What’s more, unlike with certain other tax forms, 1099-NEC doesn’t have an automatic extension. Therefore, if you happen to miss the deadline, you might not actually get your tax return back. However, if you have a legitimate reason for missing the date, you can contact the IRS and discuss it with them – they might offer an extension, but they also might refuse.
The IRS doesn’t tend to look kindly on taxpayers and businesses who fail to hand in forms on time. It will issue fines and penalties to those who fail to adhere to the given guidelines and the Jan 31 deadline. If you don’t hand in your form in time, you can expect to pay a penalty between $60 to $310, and that’s for each form that turns up late.
If the business completely disregards the need to file the form, they can receive a minimum penalty of $630 per form, or 10% of the total income reported on the form. Again, that applies to each form. If you work with a lot of contractors and forget or fail to file the relevant forms for them, you could face hefty fines from the IRS.
There are two ways in which you can file your 1099-NEC form: either manually by the mail or electronically via the IRS’s digital online filing service.
There are pros and cons to both options. These days, a lot of people like to file tax forms online. It’s quick, convenient, and you can submit the forms right up to the deadline, without having to worry about any delays or disruptions that are out of your control. In contrast, when sending forms by mail, there’s always a risk of the documents getting lost or taking longer than expected to arrive at the destination.
At the same time, filing the old-fashioned way also has its advantages. Many people find that they prefer filling in documents by hand, as they can easily check them for mistakes and take their time with each of the key sections. In contrast, some people have a tendency to rush through digital forms and may miss some vital piece of information or detail.
Overall, the right option will come down to personal preference. You most likely have a preferred way of filing your tax forms, and you can simply choose to stick with that. But remember, if it’s getting close to the deadline, you may be better off filing online. This way, the IRS will receive your form right away, as opposed to having to wait for it to arrive via mail.
Let’s say that you’re a contractor or freelancer who did some work for a company earlier in the year. As the tax return deadline approaches, you get a 1099-NEC form from that company, but it isn’t correct. Perhaps it has the wrong amount on it, or the company made a mistake when filling in your account number or personal details. What should you do?
Well, the first thing is to be proactive. Keep an eye on your mail and check any 1099 forms as soon as they arrive to spot possible discrepancies. If there’s anything wrong, contact the payer right away. Let them know about the issue. More often than not, they’ll be happy to issue an amended 1099-NEC form to the IRS with the correct info.
Unfortunately, in some cases, the payer might refuse or challenge your assertion. In that case, you’ll have to take the matter up with the IRS directly. You can call the IRS helpline and speak with their representatives to explain the issue, and they should be able to provide guidance about the next best steps to take.
The 1099-NEC form is relatively short and simple. As such, it should be easy to fill in, for the most part. However, there are some complexities involved, and many people and businesses struggle with certain boxes and sections. Plus, if you fail to hand it in on time, or make a mistake along the way, you could find yourself facing a significant penalty.
To avoid any issues and make form filing much easier, consider Bonsai Tax. Our handy tax software for freelancers can simplify taxes for all.
Here are some of the most commonly asked questions regarding the 1099-NEC form.
Box 1 of Form 1099-NEC should include the total amount paid to any freelancers, contractors, or other non-employee individuals for business services, parts, and materials. Basically, it includes any money paid to someone who isn’t on your payroll for business services they provided. That could be a contractor who painted your office, for example, or another self-employed professional you worked with during the tax year.
It can be stressful as a freelancer or contractor if you don t receive the necessary 1099 forms to file your tax return by the deadline. If that happens, there are other forms you can fill in to let the IRS know. Specifically, Form 4852 and Form 1099-R are recommended for freelancers to estimate their wages and earnings and report them to the IRS. It’s also a good idea to contact the IRS direct, which you can do online or over the phone, to discuss the specifics of the situation and get expert assistance.
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