Form 1099-NEC: Nonemployee Compensation
Written by Stephanie Glanville
Stephanie Glanville is the Marketing Manager of TaxBandits. She has several years of experience with IRS tax forms and the funtionality of TaxBandits. With a passion to help business owners better understand their IRS tax forms and filing, she aims to create content that is valuable and informative.
Overview:
Businesses use Form 1099-NEC to report payments of $600 or more to freelancers, independent contractors, and self-employed individuals for services rendered during the tax year.
Table of Content:
- What is Form 1099-NEC?
- What is Nonemployee compensation?
- Who can file Form 1099-NEC?
- What are the new changes in Form 1099-NEC for the 2023 tax year?
- What information is needed to file Form 1099-NEC?
- What are the different copies of Form 1099-NEC?
- How does the 1099 filing process work?
- What should the recipients do with the 1099-NEC copy?
- When is the reporting due for Form 1099-NEC?
- What are the penalties for not filing Form 1099-NEC?
- How can I request an extension for filing Form 1099-NEC?
- Simplify 1099-NEC E-filing and Recipient Copy Distribution with TaxBandits!
Key Takeways:
- Form 1099-NEC reports nonemployee compensation of $600 or more to nonemployees during the tax year.
- The 1099-NEC replaced the 1099-MISC in 2020 for reporting nonemployee compensation. On the other hand, Form 1099-MISC is used to report miscellaneous income to the IRS.
- Businesses paying nonemployee compensation in a tax year must file Form 1099-NEC with the IRS and provide a copy to the recipients.
- To avoid penalties, payers must file Form 1099-NEC with the IRS by January 31, either
electronically or by paper.
What is Form 1099-NEC?
Form 1099-NEC is used for reporting payments made to non employees. Previously, such payments were reported on Form 1099-MISC in box 7. It's important to note that the 1099-NEC form is not a substitute for Form 1099-MISC but rather a different form for reporting nonemployee compensation.
What is Nonemployee compensation?
Nonemployee compensation, also commonly referred to as self-employment income, is the payment made to individuals who are not company employees but provide services to the company. This group includes independent contractors, freelancers, consultants, and other self-employed individuals. Nonemployee compensation is a broad term that encompasses various types of services, such as professional service fees, commissions, prizes, awards, and other forms of compensation for services provided.
How is Form 1099-NEC different from Form 1099-MISC?
Form 1099-NEC and Form 1099-MISC are tax forms used to report various types of payments to the IRS.
Form 1099-NEC (Nonemployee Compensation) reports payments of $600 or more made to nonemployees for services performed in the course of a trade or business. This form typically includes payments to independent contractors, freelancers, consultants, and other self-employed individuals. It was reintroduced in the tax year 2020 to separate nonemployee compensation reporting from Form 1099-MISC.
On the other hand, Form 1099-MISC (Miscellaneous Income) reports a wide range of miscellaneous income, including rents, royalties, prizes and awards, medical and healthcare payments, crop insurance proceeds, etc.
Who Must file Form 1099-NEC?
Businesses and individuals can file Form 1099-NEC if they meet the following four conditions outlined by the IRS. Let's examine these conditions:
- Payments made to someone who is not an employee of the company.
- Payment made for services in the course of their trade or business.
- Payment made to an individual, partnership, estate, or, in certain situations, a corporation.
- Any payments made to the payee of at least $600 within a year must be reported.
Exceptions: It is important to note that not all taxable payments have to be reported on Form 1099-NEC. Though Payments may be taxable but are not required to be reported on 1099-NEC, include the following:
-
Payments to corporations, including Limited Liability Companies (LLC), are treated as C or S
corporation payments. - Payments for merchandise, telegrams, telephone, freight, storage, and similar items.
- Payments of rent to real estate agents or property managers.
- Wages, any bonuses, prizes, and awards paid to employees (use Form W-2).
- Military differential wage payments (use Form W-2).
- Business travel allowances paid to employees (may be reportable on Form W-2).
- Cost of current life insurance protection (use Form W-2 or 1099-R).
- Payments to a tax-exempt organization.
- Payments made to homeowners (use Form 1098-MA).
- Compensation for injuries or sickness by the Department of Justice or under a state program.
- Compensation for wrongful incarceration.
What are the new changes in Form 1099-NEC for the 2023 tax year?
Form 1099-NEC has not undergone significant changes, but it's important to stay updated on any IRS updates that may affect the reporting obligations.
- The threshold for electronic filing of 1099-NEC has been reduced: The e-filing threshold for various 1099 forms, including Form 1099-NEC, has been reduced. The previous threshold of 250 or more returns has been changed to 10 or more aggregate returns. This new change affects returns filed on or after January 1, 2024.
- New Penalties for Incorrect Form 1099-NEC Filing: The IRS has recently announced an increase in penalties for Form 1099-NEC. It is important to stay informed and aware of the new penalty structure to avoid unwanted penalties. Please take note of the following updated penalty structure:
| Delaying period | New penalty rate |
|---|---|
|
Filing up to 30 days late |
$60 per form |
|
Filing between 31 days after the deadline and August 1 |
$120 per form |
|
Filing after August 1 or not at all |
$310 per form |
|
Intentional Disregard |
$630 per form |
What information is needed to file Form 1099-NEC?
Completing Form 1099-NEC is quite simple for businesses. They only require a few pieces of information from the payer:
- Payer's identifying information, including their business name, street address, telephone number, and Taxpayer Identification Number(TIN).
- The recipient's information includes their name, mailing address, and Taxpayer Identification Number(TIN).
- The total amount of nonemployee compensation paid during the tax year.
- Federal income tax is usually not withheld unless backup withholding rules apply.
-
State-specific information includes any state income tax withheld, the payer's state number, and the
state income.
Click here to learn more about Form 1099-NEC Instructions in detail
What are the different copies of Form 1099-NEC?
Form 1099-NEC has 4 different copies, each one serving different purposes. These copies can be categorized as payer and recipient copies. The following are the four copies of Form 1099-NEC:
| Payer Copies |
Copy A - Should be filed with the IRS Copy 1 - To be filled by the State agency(only when required) |
|---|---|
| Recipient Copies |
Copy B - To be furnished with the recipients Copy 2 - Is to be given to recipients to file with their state income tax return. |
How does the 1099-NEC filing process work?
The filing process for Form 1099-NEC involves several steps for the payer (the entity or individual making payments to nonemployees) to comply with IRS requirements:
Gather Information through W9:
The payer collects necessary information from each nonemployee, including their name, business name, address, Taxpayer Identification Number (SSN or EIN), and business structure through Form W 9 and business structure. It also asks them to certify that they aren’t subject to backup withholding.
Identify Reportable Payments:
The payer identifies payments made to nonemployees, such as independent contractors or freelancers, for services rendered in the course of their trade or business. Payments totaling $600 or more during the tax year are
typically reportable.
Complete Form 1099-NEC:
The payer fills out Form 1099-NEC for each nonemployee who made reportable payments during the tax year. The form includes information such as the payer's/recipient's name, address, taxpayer identification number, and the total amount of nonemployee compensation paid.
File with the IRS:
The payer files Copy A of Form 1099-NEC with the IRS. This can be done electronically or by mailing paper to the IRS. The filing deadline is typically the end of January of the following year, although it may be extended if
filing electronically.
Provide Copies to Recipients:
The payer provides Copy B of Form 1099-NEC to each recipient by January 31st of the following year. Recipients use this form to report their income on their tax returns.
Corrections in Form 1099-NEC:
If Form 1099-NEC contains errors from the previously filed one, the payer must submit the correct information to issue corrected returns to both the IRS and the affected recipients. Corrections should be made as soon as possible to avoid potential penalties.
What should the recipients do with the 1099-NEC copy?
If a recipient receives a Form 1099-NEC indicating that they received nonemployee compensation of $600 or more during the tax year, there are several steps they should follow:
Review the Form:
Carefully review the information provided on the Form 1099-NEC to ensure accuracy. Check the amount of income reported and verify that personal information, such as name and Taxpayer Identification Number (usually Social Security Number or Employer Identification Number), is correct.
Report Income on Tax Return:
The income reported on Form 1099-NEC must be reported on the recipient's federal income tax return. Typically, this income is reported on Schedule C (Form 1040) if the recipient is self-employed or engaged in a trade or business as a sole proprietor. If the recipient is not self-employed but received nonemployee compensation, they should report it on the appropriate line of their tax return based on their tax situation.
Keep Records:
Maintain accurate records of any income reported on Form 1099-NEC and any related expenses. This documentation will be useful in the event of an IRS audit or if there are any questions about the income reported on the tax return.
When is the reporting due for Form 1099-NEC?
Form 1099-NEC must be filed by January 31 of the following year, either on paper or electronically. If the deadline falls on a weekend or holiday, it will be postponed to the next business day. The following are the due dates for Form 1099-NEC:
| Electronic Filing | Recipient Copy | Paper filing |
|---|---|---|
|
January 31, 2024 |
January 31, 2024 |
January 31, 2024 |
What are the penalties for not filing Form 1099-NEC?
If a business fails to file Form 1099-NEC by the deadline (January 31), the IRS will impose penalties. The penalty amount varies between $60 to $ 630 for each form, depending on the business's size and when it files the return.
For small businesses with gross receipts less than or equal to 5 million:
| The time when the returns were filed | Penalties |
|---|---|
|
Not more than 30 days late |
$60 per form- $220,500 maximum |
|
31 days late – August 1 |
$120 per form -$630,500 maximum |
|
After August 1 or Not At All |
$310 per form - $1,261,000 maximum |
|
Intentional Disregard |
$630 per form - No limitation |
For large businesses with above $5 million in gross receipts and government entities
| The time when the returns were filed | Penalties |
|---|---|
|
Not more than 30 days late |
$60 per form- $630,500maximum |
|
31 days late – August 1 |
$120 per form -$1,891,500 maximum |
|
After August 1 or Not At All |
$310 per form - $783,000 maximum |
|
Intentional Disregard |
$630 per form - No limitation |
How can I request an extension for filing Form 1099-NEC?
If businesses need more time to file Form 1099-NEC with the IRS, they can request an extension using Form 8809, Application for Extension of Time to File Information Returns. Note that the extension for Form 1099-NEC is no longer automatic. However, businesses can still file Form 8809 to extend the deadline for 1099-NEC Forms under
certain circumstances:
- The filer experienced a catastrophic event in a federally declared disaster area, which made it impossible to resume operations or access necessary records.
- Fire, casualty, or natural disasters have affected the filer's operations.
- The filer cannot file due to the death, serious illness, or unavoidable absence of the individual responsible for filing the returns.
- The filer is in their first year of establishment.
Simplify 1099-NEC E-filing and Recipient Copy Distribution with TaxBandits!
Form 1099-NEC can be filed either by paper or electronically. Paper filing is a traditional method that involves downloading, completing, and mailing the document to the IRS. In contrast, the IRS highly recommends payers
e-file 1099-NEC returns to stay tax-compliant and for quick processing.
The IRS has reduced the e-filing threshold from 250 or more returns for a single return to 10 or more aggregated returns. If businesses are filing more than ten returns, including Form 1099-NEC, 1099-MISC, Form W-2, or any other information returns totaling 10, they are required to e-file the returns. Here's where TaxBandits comes into play!
TaxBandits, as an IRS-authorized e-file service provider, offers valuable solutions for tax professionals and businesses of various sizes. Follow these simple steps to e-file Form 1099-NEC:
- Step 1 : Create an account with TaxBandits and select Form 1099-NEC.
- Step 2 : Enter the required 1099-NEC information.
- Step 3 : Review the details and transmit the 1099-NEC to the IRS & State.
If businesses have opted for postal mailing or online access services for furnishing the recipient copies, TaxBandits will furnish the 1099-NEC copies to the recipients on the filer's behalf.
About the Author
Stephanie Glanville is the Marketing Manager of TaxBandits. She has several years of experience with IRS tax forms and the funtionality of TaxBandits. With a passion to help business owners better understand their IRS tax forms and filing, she aims to create content that is valuable and informative.
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