A Step-by-Step Guide to Form 1099-NEC

What is a 1099-NEC?

The 2021 calendar year comes with changes to business owners’ taxes. The new IRS form 1099-NEC is how employers will report non-employee compensation, instead of reporting these payments in box 7 on Form 1099-MISC. Form 1099-MISC still exists, but it is just to list miscellaneous income, like prizes and awards or medical payments.

Additionally, a 1099-NEC form is still a different from a W-2, which is provided to employees whose taxes are withheld by their employer. A 1099-NEC will be provided to vendors or sub-contractors who worked for a period of time for an employer to complete a project, with total payments exceeding $600. Independent contractors or self-employed contractors must still fill out a Form W-9 offered by IRS in their tax forms section.

Employers, or payers, are required to file Copy A of the Form 1099-NEC with the IRS by January 31st, by mail or e-file.

1099-NEC Definition

The new Form 1099-NEC is for employers to document non-employee compensation for independent contractors and freelancers. Independent contractors must receive Copy B of the 1099-NEC in order to include it with their tax returns.

These conditions must be met to report payment for non-employee compensation:

• The payment made to someone other than an employee, such as an independent contractor or freelancer who completes a temporary assignment.
• The payment must be made for projects and services in the course of your trade or business.
• The payments made to the payee must be at least $600 during the year.

As aforementioned, payers are required to provide a Form 1099-NEC to the payee and file it with the IRS by January 31st of the following year.

1099-NEC Versus 1099-MISC

Prior to the 2020 tax year, payments made to independent contractors or self-employed contractors were reported in box 7 on Form 1099-MISC.

With the introduction of the 1099-NEC, the information reported on box 7 of the old 1099-MISC — namely payments totaling over $600 — will now be reported on the 1099-NEC.

The 1099-MISC still remains, but it will now just be used for reporting miscellaneous income, such as rent and healthcare payments.

Due to the anticipated confusion for the new form, there will probably be filers who need an extension to complete a 1099-NEC. For a taxpayer to file for an extension, they must meet the filing requirements from Form 8809. Here are some of the filing requirements:

• The filer suffered a catastrophic event in a federally declared disaster area that made the tax filer unable to keep their business operating or made the records they need to file taxes unavailable.
• Fire, causality, or natural disaster affected the operation of the filer, and;
• The death, contracting a serious illness, or unavoidable absence of the individual responsible for filing the information returns affected the business of the filer.

How to Fill Out a 1099-NEC

Both the payer’s and the recipient’s information includes both parties name, address, and taxpayer ID. Non-employee payment should include the total compensation for the past tax year. This amount is the gross proceeds.

As the payer, you will also need to include:

• Federal income tax withheld, if any
• An optional account number
• Check the FATCA filing box, if applicable
• State tax withheld, if any
• State/payer’s state number
• State income

Both parties involved provide their names, address, and taxpayer identification numbers. Non-employee compensation is listed in Box 1 of the form. This should be the total compensation for the past tax year in the form of gross proceeds.

It is important to note that Box 4 is for federal income tax withheld. Even though this is uncommon for most instances when you hire non-employees unless you received a backup withholding order for that person, backup withholding requires a payer to withhold tax from payments not otherwise subject to withholding. There is a list of backup withholding rules on the IRS website at IRS.gov.

Boxes 5 through 7 are listed for your convenience only according to the official instructions provided by the IRS website. You can use each set of boxes to provide information for up to two separate states. This information is found in the same instructions as the instructions for the 1099-MISC (directly below it).

Box 5 is for any state tax that you pay to the provider for their services if it is required by your state.

Box 6 is for you, as the payer to list the identification number of the state to which you are reporting the tax information.

Box 7 allows you to list the amount of the state payment.

1099-NEC Filing Rules for Employers

Regardless of the size of the business, the IRS states businesses should file a 1099-NEC form for each person whom they paid at least $600 if they:

• Performed services by someone who is not their employee (including parts and materials) by listing this in Box 1.
• Cash payments for fish or other sea-based life bought from anyone involved in the business of catching fish. An example of this is a restaurant that purchases fish from a fish market that may employ fishing boats.
• Made payments for legal advice from an attorney.

Businesses must also use the new Form 1099-NEC if they withheld any federal income tax under the backup withholding rules regardless of the type of payment made.

Sample 1099-NEC

The 1099-NEC is for non-employee compensation and is not for miscellaneous income. When you fill out a Form 1099-NEC you will fill out:

• The payers’ name, street address, city or town, state, country, zip code or foreign zip code, and telephone number.
• Box 1 is non-employee compensation listed as gross proceeds.
• Next, you will need to fill out the payer’s tax identification number.
• Then, include the Recipient’s tax identification number.
• Boxes 2 and 3 are left blank.
• Next, list the recipient’s name.
• Then, list the recipient’s full address including an apartment number or suite number, if necessary.
• Box 4 is used to list the amount of federal income tax withheld if any. When preparing tax forms for non-employees, federal income tax is often not withheld unless there is an order to do so by the court or the IRS.
• Next, list the recipient’s city, state, country, and zip code or foreign postal code.
• If you have an account number, you may include it toward the bottom of the form. This is an identifying number you assigned to identify the account.
• Box 5, 6, and 7 are optional for you. They are to use to document state tax withheld, state and payer’s number, and the state income.