The 1099-NEC Form is a tax form for reporting payments to non-employees, like independent contractors.
The deadline to mail or e-file 1099s to the IRS for the 2022 tax year is January 31, 2023
Who uses IRS Form 1099-NEC?
1099-NEC is used by businesses to report any form of non-employee compensation above $600. Non-employee compensation is any type of paid work that isn't performed by an employee.
Just like how an employer issues a W-2 form for income payments to employees, the 1099-NEC is to report income payments to non-employees. This is an umbrella term that includes independent contractors, freelancers, and any other self-employed individual.
Examples of non-employee compensation include website design, freelance writing, commissions, and other contract work. These are often for projects with a set period of time or for particular, recurring assignments.
As an example, if you own a restaurant, you would provide a form W-2 for each of your cooks, waiters, cleaning staff, and others on your payroll. But if you have an accountant working out of their own firm or if you hired a graphic designer to do your logo, you'll file a 1099-NEC as a payer.
Form 1099-NECs are filed at the beginning of each new year, for payments made in the prior calendar year.
In addition to this, clients are required to fill out this form for any service provider for whom they withheld federal income tax under backup withholding rules of any amount (the $600 threshold does not apply).
Recap: recent IRS changes
The IRS made revisions to the 1099-NEC in January 2022.
1099-NECs are now designed for "continuous use", meaning you can use the current template for future years (until revisions are made as needed). Originally the IRS would release a new version each year.
The size of the slip has been shrunk slightly so you can fit three slips onto one sheet of paper.
Businesses reporting cash payments of purchases of fish for resale purposes used Box 1 of the 1099-NEC. Starting in the 2021 tax year, these payments need to be reported in Box 11 of the 1099-MISC instead.
Business reporting sales of consumer products for resale use Box 7 of the 1099-MISC. Starting in the 2021 tax year, payments can be reported on a 1099-NEC if they check Box 2.
The box for reporting the FATCA filing requirement (Foreign Account Tax Compliance Act) has been removed.
This form replaces IRS Form 1099-MISC for nonemployee compensation
The "MISC" in 1099-MISC stands for miscellaneous income, so it's used as a place to record various types of payments such as rent, attorney fees, medicare, and healthcare payments greater than $600. One of the uses of this form was to report nonemployee compensation (payments to contractors) under Box 7 of the 1099-MISC. The 1099-NEC replaces that function now.
Are there any exceptions to 1099-NEC I should know about?
The main error businesses make when filing Form 1099-NEC is reporting payments that should go on a different slip.
First, if your independent contractor is registered as a C corporation or an S corporation, you do not need to file any slip. You can confirm their filing structure on the W-9 form they should provide to you.
Second, never file a Form 1099-NEC for employees. Doing so means you’re incorrectly classifying your employee as an independent contractor. Report their income on a W-2 instead.
Third, the 1099-NEC is not used for filing personal payments. For example, if you paid a babysitter, you don't need to give them a 1099-NEC because the babysitting service was a personal expense, not a business expense related to your work.
Finally, gross proceeds (such as in a settlement agreement) paid to an attorney like a law firm fall under a special category and are filled under Form 1099-MISC.
How to fill in IRS Form 1099-NEC
Any business that made payments to a non-employee needs to generate a 1099-NEC. They provide a copy to the non-employee and a copy to the IRS.
Many tax software and payroll solutions let you automatically generate 1099s, but small businesses might prefer to do them manually:
To begin, you need to obtain the necessary personal details of the independent contractor by requesting a Form W-9 from the contractor. The contractor will complete the form, which will record their legal name, business entity, address, and most importantly their taxpayer identification number (ITIN).
Once you have a W-9 you can complete the 1099-NEC. Each 1099-NEC is filled out with the same information on two copies - Copy A and Copy B.
How do I file Form 1099-NEC?
The business files Copy A with the IRS and provides Copy B to the independent contractor. Many states also require businesses to send a copy of the 1099-NEC to the state tax office as well. Check with your accountant to review the requirements.
You can file completed forms online or by mail.
To file online, the Internal Revenue Service uses the IRS Filing Information Returns Electronically (FIRE) system. You'll need to use a third-party software or filing service to generate the forms because the IRS doesn't accept scanned or manually-completed versions. If you're using Deel, you can generate and file 1099-NECs directly from the Taxes tab in your dashboard (here's how).
To file on paper, you'll need to request special scannable templates from the IRS.
What is the deadline for 1099-NEC?
The Form 1099-NEC due date is January 31st. For the 2022 tax year, that means the 1099-NEC needs to be filed on or before January 31, 2023, either electronically or by mail.
What are the fines for missing the filing deadline for Form 1099-NEC?
If you miss the filing deadline, the IRS may apply a late filing penalty. The fine ranges from $50 to $270 per form, depending on how late the forms are submitted. If you require a filing extension, you can request one by submitting Form 8809 (Application for Extension of Time To File Information Returns) to the IRS by January 31. Form 8809 can't be filed online and must be mailed.
How do I record a 1099-NEC on my return?
If you’re the recipient of a 1099-NEC (a payee), report the recorded income on your income tax return.
This self-employment income is generally recorded on Schedule C for sole proprietors, and on Schedule K-1 for partnerships.
You'll pay income tax and self-employment tax (social security and medicare) on this income, but remember to also claim your tax deductions for your business expenses.
What if I do not receive a 1099-NEC?
If an independent contractor received income from a client, they need to report that income on their tax return, even if a 1099-NEC is not provided. That means income under $600 still needs to be reported, even if it doesn't meet the threshold for a tax slip. For sole proprietors who file a Schedule C, include the income on Line 1 (Gross Receipts and Sales) along with any income that was accompanied with a 1099-NEC.
1099-NEC vs. 1099-MISC: What are the differences?
Beginning in 2020, Form 1099-NEC completely replaces Box 7 on Form 1099-MISC for reporting non-employee compensation.
Box 7 on the 1099-MISC form will now be used to report direct sales of $5,000 or more.
For more details, compare the differences between Form 1099-MISC and Form 1099-NEC.
When do you still need to use IRS Form 1099-MISC?
The renewed Form 1099-NEC only replaces one box on Form 1099-MISC, so everything else you use 1099-MISC for remains the same. That means that rents, attorney fees, crop insurance proceeds, proceeds from a fishing boat, and state-earned income still go under the 1099-MISC.
Further reading: What is Form 1099-MISC and Who Needs It?
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Disclaimer: This information is provided for informational purposes and should not be considered tax advice or a substitute for official IRS publications. Consult with an CPA accountant or tax professional for help.