If you have ever outsourced some of your business’s tasks, or if you are a freelancer or an independent contractor, you may be aware of the IRS 1099-NEC Form. This article will go over what a 1099-NEC is, when the form is required, and how to fill it out.
Form 1099
When you are first looking into Form 1099, it may seem a bit overwhelming, as there are over 20 variations of this form. Basically, the 1099 is used to report certain incomes to the Internal Revenue Service (IRS), including anything from interest income to prize winnings.
The most common version of the 1099 Form is the 1099-NEC (non-employment compensation). If a business owner outsources any work and pays someone more than $600 during the financial year to complete it, they must fill out Form 1099-NEC.
Form 1099-NEC
As a small business owner, you must become comfortable with the 1099-NEC Form if you ever plan to outsource any tasks for the business. The 1099-NEC is used to report to the IRS that you paid a non-employee more than $600 during a financial year.
It is your responsibility as a business owner to issue and file the 1099-NEC. If you are the payee and you have not received your copy of the 1099-NEC, you should contact the business that paid you.
| Who gets a 1099-NEC? |
| Any independent contractor (or partnership) to whom you paid more than $600 during the year. |
What is an independent contractor?
If you are an individual who works on a contractual basis as a non-employee, you are an independent contractor. This means you are considered self-employed. Some common examples of independent contractors are photographers, virtual assistants, electricians, and hair stylists.
If you are an independent contractor, be aware that even if a business is not required to issue a 1099-NEC (because you made less than $600 from them during the financial year), you still are responsible for reporting all income to the IRS.
| Whose responsibility is it to file the 1099-NEC? |
| The payer. If your business paid someone to complete outsourced work, you are responsible for filing the 1099-NEC form with the IRS and sending the contractor a copy. |
When is a 1099-NEC Form unnecessary?
As we have already gone over, you do not need to issue a 1099-NEC if you paid the payee less than $600 during the financial year. There are also a few other situations where it would be unnecessary to issue a 1099.
- Corporations – You do not need to prepare a 1099-NEC for an independent contractor if they are registered as a C-Corp or S-Corp. However, it is rare for this to occur. To check to see if a contractor is registered as a corporation, look at their W-9 form.
- Employees – If the person you are paying is considered an employee, you will not file a 1099-NEC for them, but rather a W-2. The IRS is very strict about businesses categorizing the people they pay correctly. If the person is an employee, you must withhold and pay taxes on their earnings. If you try to mislabel the people you are paying as independent contractors to avoid the taxes, the IRS has very steep penalties you could face.
- Independent Contractors hired through a third party – If you use a platform such as Upwork or Fiverr to outsource some of your business’s tasks, you may not need to issue a 1099-NEC. This is because some of these platforms are considered third-party settlement organizations. You will have to check the specific platform you are using for a FAQ section to be sure whether or not you are required to file the form.
Filing the Form 1099-NEC
Now that we have gone over when the Form 1099-NEC is required, let’s look at an example and then go over how to fill out the form.
Imagine you are a small business owner who wants to enhance your social media presence, but you have no idea where to start. You decide to outsource the task. You find a highly recommended social media expert and you hire them as an independent contractor.
They suggest you hire a photographer to get some professional pictures of your merchandise for your social media accounts. You agree and hire a photographer as an independent contractor. Both tasks are completed within a couple of months during the financial year.
You paid the social media expert $1200 and the photographer $560. Tax season has arrived, who must you issue a 1099-NEC to? The social media expert. You did not pay the photographer over $600, so while they must report the income to the IRS, you do not issue a 1099-NEC for them.
What if the social media expert was not an independent contractor but rather a company called “Social Expert, Inc”? Would you still need to fill out the 1099-NEC? No, as their name signifies, they are a corporation so you would not be required to file a 1099-NEC.
How do you file a 1099-NEC form?
When filling out Form 1099-NEC, you must fill out two copies: Copy A and Copy B. Copy A is for the IRS, and Copy B is for the independent contractor.
First, gather all the information needed (total amount paid and the contractor’s name, address, and taxpayer ID – the contractor’s information should all be found on the W-9).
Copy A:
- Fill out Copy A with the information gathered.
- Submit it to the IRS.
- You can mail it in (but it must be a physical Form 1099-NEC, not a copy downloaded from the IRS website). If you use a physical form for Copy A, you will need to also fill out form 1096.
- Or submit it online using the IRS Filing a Return Electronically (FIRE) system by January 31st. To use the FIRE system, you need a Transmitter Control Code (TCC), which you can request by filling out Form 4419 and submitting it to the IRS at least 30 days prior to the 1099-NEC form deadline.
Copy B:
- Fill out Copy B exactly as you did Copy A.
- Send Copy B to the independent contractor no later than January 31st.
- You can use a downloaded form of copy B off the IRS website and mail it to your contractor
- Or you can email a copy to them. You can only email it if you receive explicit consent to do so though (full instructions on explicit consent can be found on the IRS website).
Also, note the 1099-NEC may need to be sent to the state as well, depending on which state you are in.
| What if you are an independent contractor and you did not receive your 1099-NEC? |
| If you are an independent contractor and you know you should receive a 1099-NEC from your client and you have not, you must request one from that client. Even if you do not receive the 1099-NEC from the client, you are still responsible for reporting that income to the IRS. |
How does Remote Books Online help with this process?
Once tax season arrives and you need to know whether or not you need to file any 1099-NEC forms, having up-to-date and accurate records is necessary. This is where Remote Books Online comes in. Your bookkeeper at Remote Books Online will send you all the information you need, including who you paid, how much you paid them, and what you paid them to do. This information will tell you exactly who needs a 1099-NEC prepared.
| When is the 1099-NEC form due? | |
| Both Copy A and Copy B must be sent to their appropriate recipients by January 31. | |
| What if you file a 1099-NEC late? | |
| If you miss the deadline and file form 1099-NEC late, you will end up paying a fine depending on how late you file. | |
| Within 30 days late: | $50 fee |
| More than 30 days late, but before August 1st: | $100 fee |
| On or After August 1st: | $260 fee |