1099-NEC Form for Nonemployee Compensation: How It Works

Form 1099-NEC is a tax form issued by the Internal Revenue Service (IRS) that businesses use to report nonemployee compensation. (Employee compensation goes on IRS form W-2.) Any business that pays more than $600 to a freelancer, sole proprietor, independent contractor, miscellaneous service provider, or self-employed individuals must file form 1099-NEC by the end of the calendar year.

A 1099-NEC is one of many 1099 IRS forms, including form 1099-DIV used for reporting dividend and distribution income, form 1099-K for reporting third-party transactions and payment cards, and form 1099-MISC used for reporting personal payments and miscellaneous income. The 1099-NEC form is part of the Combined Federal State Filing program, which uses electronic filing to simplify filing information returns.

Between 1982 and 2020, businesses used form 1099-MISC to report nonemployee compensation. However, the 1099-MISC form had dual filing deadlines that confused business taxpayers. Form 1099-NEC was the IRS’s solution to the confusion—the form’s single filing due date is January 31.

One change to note: On the previous form, you would report nonemployee compensation in Box 7; however, you should use Box 7 on the new form 1099-NEC to report direct sales of $5,000 or more.

Any business that compensates one or more external payees more than $600 during a given tax year should file IRS form 1099-NEC. When initiating business with an external payee, you should issue the worker IRS form W-9. This form collects taxpayer information, such as the payee’s legal name, Social Security number, and address. You need this information to file form 1099-NEC. In addition, if you pay any amount to someone from whom you withhold federal income tax under backup withholding rules, you need to complete a 1099-NEC.

If you’re a sole proprietor, you should receive a 1099-NEC form from any business that paid you $600 or more for work completed in 2020 or later. You will use the information on the 1099-NEC to report your self-employment income on Schedule C of your income tax returns and will likely be required to pay self-employment tax (FICA).

Form 1099-NEC is relatively short and straightforward; however, it does involve several copies. Copy A goes to the IRS, Copy 1 goes to the state tax department, Copy B and Copy 2 go to the recipient, and Copy C goes into the business’ tax records. Here’s what to include on the form.

• Payer information: This includes name, address or P.O. Box, and taxpayer identification number (TIN).
• Payee information: This includes name, address, and TIN.
• Total amounts: This includes the total amount of compensation received as well as the total amount of federal or state income tax withholdings.

Payers must submit form 1099-NEC to the IRS by January 31. If the due date falls on a weekend or holiday, the form is due the next business day. If you have questions about the filing requirements, visit the FAQ section on the IRS website, or speak with a certified CPA or tax professional.

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