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These tax forms affecting independent contractors and freelancers have changed. Learn how and when to file.
When paying taxes, freelancers and contractors must be aware of two forms: 1099-MISC and 1099-NEC. For years, everyone used the 1099-MISC form, which tracks annual income that has yet to be taxed. In 2020, the IRS added form 1099-NEC to the tax catalog; NEC stands for “nonemployee compensation.” And in 2022, the IRS released a continuous-use format version of the 1099-NEC form and added a Foreign Account Tax Compliance Act (FATCA) filing requirement for the 1099-MISC.
We’ll explain the differences between forms 1099-MISC and 1099-NEC and share tips to help small business owners, freelancers and contractors minimize tax mistakes.
The 1099-NEC form provides a simplified way to report independent contractor wages. While you can view a sample 1099-NEC on the IRS website, you can’t download the document. Instead, you must order the form or file it online via the Filing Information Returns Electronically (FIRE) system.
The IRS requires businesses to report nonemployee compensation of $600 or more using Form 1099-NEC (not Form 1099-MISC).
Form 1099-NEC. Source: IRS
Self-employed individuals who supply services to a business that exceed $600 of nonemployee compensation may receive a 1099-NEC from the company for which they provided services. In addition, individuals, sole proprietors, partnerships and LLCs may receive a 1099-NEC, as they are not W-2 employees of the business.
A 1099-NEC covers several types of income. The information you fill out on this form includes:
The 1099-MISC form is used if $600 or more in payments (other than nonemployee compensation) was paid to an individual or LLC. Rent, legal fees and prize winnings qualify to be reported on a 1099-MISC.
Form 1099-MISC. Source: IRS
Payees eligible for the 1099-MISC form should complete Form W-9. All payments, including attorneys’ fees, awards, healthcare, royalties and rents, should be reported if they total $600 or more. For a complete list of included payments, visit the IRS website’s 1099-MISC page.
Here’s a closer look at the items a 1099-MISC includes:
As of 2020, the 1099-NEC form is used for all independent contractor income. The 1099-MISC is still a valid form. However, it is reserved for payments that are not contractor or freelancer wages, such as rent, prizes and awards.
The due dates for the forms are different, as well. For example, the 1099-NEC is due Jan. 31, while the due date for the 1099-MISC is March 1 if filed by paper and March 31 if filed electronically.
If a business hired a freelancer or contractor and paid $600 or more for services rendered in a calendar year, it must report those earnings by filing Form 1099-NEC.
Form 1099-NEC has two copies:
Contractors who receive Copy B of Form 1099-NEC are not required to file the form. However, they should receive a copy of the form for their records; they can request one if necessary. Contractors should report any self-employment income on Schedule C.
Some locations require you to file your 1099-NEC and 1099-MISC forms with your state. The following states are exempt from 1099 filing:
Some states have additional rules about filing electronically regarding 1099s.
Companies that must file a 1099-NEC will first need a W-9 form from the contractor. A W-9 form includes the contractor’s legal name or business name, business entity, current address, and taxpayer identification number. Use the W-9 information to fill out the 1099-NEC, double-check payment totals, and note this information on the form.
Since the 1099-NEC cannot be downloaded from the IRS website, you must plan ahead to ensure you file on time.
Copy A
You must send Copy A to the IRS by Jan. 31. You can mail the form or file it electronically:
Copy B
Copy B can be sent physically or electronically to the freelancer or contractor. However, you must have their consent to send the form electronically. Obtain consent by emailing them. If you aren’t granted permission, you must mail the 1099-NEC to the address you have on file from their W-9.
To follow IRS rules when gathering consent, include the following information for the freelancer:
Copy A (IRS) and Copy B (contractor) of the 1099-NEC must be received by Jan. 31 of the following year. If Jan. 31 does not fall on a business day, forms will be received on the next business day.
Payroll software can streamline the process of handling payroll forms like the 1099-NEC and 1099-MISC and much more. Here’s how payroll software can help your business:
The best online payroll service for your business will fit your budget and provide the tools and functionality you need. Consider the following excellent payroll solutions that will suit many small businesses: