Most freelancers and contractors are aware of the 1099-MISC form. The 1099-MISC is used to track income throughout the year that was not already taxed. In 2020, the IRS added a new form to the tax catalog, a 1099-NEC, short for “nonemployee compensation.” In this article, we will outline what you need to know about the new form, the differences between a 1099-MISC and a 1099-NEC, and how to minimize tax mistakes for your small business.
The 1099-NEC is a simplified way of reporting independent contractor wages. You can view the sample form here. However, you cannot download the document directly from the IRS website. Instead, the form must be ordered or filed online via the FIRE system.
The 1099-NEC should be used instead of the reporting independent contractor payments in box 7 of the 1099-MISC form.
Self-employed individuals who supply services to a business that exceeded $600 may receive a 1099-NEC from the company that they provided services for. In addition, freelancers and contractors may receive a 1099-NEC, as they are not W-2 employees of the business.
If you provide services to an individual, you will not receive a 1099-NEC. However, you still need to report that income when you file your tax return.
A 1099-NEC covers several types of income. The information you will fill out on this form includes:
The 1099-MISC form is used if a $600 or more payment was paid to an individual or LLC. Rent, legal fees and prize winnings all qualify to be reported on a 1099-MISC.
The 1099-MISC is no longer used to report freelancer or contractor compensation. Nonemployee-provided work should be included on Form 1099-NEC.
Payees who are eligible for the 1099-MISC form should complete a W-9 form. All payments, including attorneys’ fees, awards, healthcare, royalties and rents, should be reported if totaling $600 or more.
Here’s a closer look at the items a 1099-NEC includes.
Payments to corporations are not usually reported. However, if a corporation you made payments to provides medical or healthcare services, you must note all payments.
As of 2020, the 1099-NEC form is for all independent contractor income. The 1099-MISC is still a valid form. However, it is reserved for payments that fall outside of contractor or freelancer wages, such as rent or attorneys’ fees.
The only business use for a 1099-NEC is for reporting nonemployee compensation. If you need to account for third-party payouts such as awards, prizes, rents and royalties, you should use a 1099-MISC.
The due dates for the forms are different as well. For example, the 1099-NEC is due Jan. 31, whereas the due date for the 1099-MISC is March 1 if filed by paper and March 31 if filed electronically.
Form 1099-NEC has two copies: Copy A and Copy B. Copy A should be filed with the IRS, and Copy B should be sent directly to the contractor. Any contractor you hired and paid $600 or more for services rendered in a calendar year must report those earnings.
Contractors receiving Copy B of 1099-NEC are not required to file the said form. However, you should receive a copy of 1099-NEC and can request one from the employer if needed for your records. Report any self-employment income on Schedule C.
Some locations also require you to file your 1099 with your state. The following states are exempt from 1099 filing:
Some states have additional rules about filing electronically regarding 1099. Always consult your CPA to make sure you are IRS compliant with your forms, including 1099.
Companies that need to 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 on the form.
Since the 1099-NEC cannot be downloaded from the IRS website, you will need to plan to make sure you file on time.
Send Copy A to the IRS by Jan. 31. You can either mail the form or file it electronically.
To receive a paper copy of the 1099-NEC, request one through the IRS website. If you are mailing the 1099-NEC, you will need Form 1096 as a cover sheet. Fill out both forms and then mail them to the IRS.
Filing electronically also requires some prep work. To use IRS’s FIRE System (Filing Information Returns Electronically), you must use compatible software that converts IRS forms into the proper format. No scanning of documents is accepted.
Before you work with FIRE, you will need a Transmitter Control Code. To get a TCC, fill out Form 4419 and submit it to the IRS at least 30 days before the 1099-NEC tax deadline. Early submittal of Form 4419 will allow the IRS enough time to provide you with your TCC. Once you receive your TCC, create your account with FIRE.
Copy B can be physically or electronically sent to the individual contractor. However, you must have consent from the contractor to send the form electronically. Obtain consent by emailing the freelancer. If permission is not received, you will need to mail the 1099-NEC to the address you have on file from the 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 form will 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.
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