Here's What You Need To Know About the 1099-NEC Form

The 1099-NEC form is a tax document that businesses or individuals use to report compensation for non-employees such as independent contractors. In fact, “NEC” stands for “non-employee compensation.” We’ll cover the basics, from who needs to file the form, to the types of payments to report and how to fill it out. So, let's dive in and get a better understanding of this important tax form.

The history of the 1099-NEC form

Four decades ago, the IRS retired the 1099-NEC in favor of the 1099-MISC form. Starting at that moment in 1983, 1099-MISC became the go-to form for reporting non-employee compensation and various types of income—everything from rental income to music royalties to freelance income. However, like fanny packs and shoulder pads, the 1099-NEC form was an ‘80s icon that made a comeback in 2020.

Why the change? The IRS wanted to help simplify and streamline the reporting process. With the old 1099-MISC form, wages for a non-employee were in one box, which could be easy to miss. By making it easier for businesses to accurately report and track non-employee compensation with a separate form, the IRS hoped to reduce confusion and errors.

As a result, the new 1099-NEC form has only one box, aptly named Box 1, which is used to report non-employee compensation.

Note: The 1099-MISC form is still in use for reporting other types of payments, such as the aforementioned rents, royalties, and prizes or awards. If your business made any of these types of payments to non-employees, you may still need to file a 1099-MISC form in addition to a 1099-NEC form.

Who needs to file a 1099-NEC form?

The 1099-NEC form reports payments for services made to non-employees, such as independent contractors, freelancers, and consultants. This form is how the IRS tracks payments made by businesses and individuals to non-employees. In turn, the form also helps to ensure that those non-employees pay the required taxes on income.

Businesses or individuals who pay non-employees $600 or more for services in a tax year must file a 1099-NEC form with the IRS. The form must be filed for each non-employee who has received a payment of $600 or more. For example, if you pay seven different independent contractors more than $600 each in a tax year, you must file seven separate 1099-NEC forms with the IRS.

If you aren’t sure if you are required to file a 1099-NEC form, consult with a tax professional. They can help you understand any exceptions or special circumstances that may apply to your situation.

Which payments should be reported on the 1099-NEC form?

In general, you would typically use a 1099-NEC form to report things like:

• Non-employee compensation, such as payments made to independent contractors or freelancers for their services

• Fees for services, such as fees paid to attorneys or accountants who are not employees of your business

• Commissions paid to non-employees for sales or other services

However, there are some exceptions to the filing requirement. Some common exceptions include payments made to corporations or tax-exempt organizations (except in the case of payments made for legal services) or payments made for personal purposes, such as gifts, rent, or household services.

How to fill out the 1099-NEC form

If it’s your first time, filling out the 1099-NEC form can feel daunting, but with instructions, it’s relatively straightforward. Here's a step-by-step guide to filling out the form:

1. Request a W9 form: You’ll actually want to request a W9 form from the independent contractor long before making your very first payment. If the contractor doesn’t provide a W9, you might need to withhold taxes from their payment. This is called backup withholding, and it's 24% of the payment. The W9 form has important details you’ll need, including the contractor's name, address, and taxpayer identification number (TIN) or Social Security number (SSN), and it’s a good idea to request it when onboarding a contractor for the first time. 

2. Determine the total payment amount: Calculate what you’ve paid the contractor during the tax year. This includes non-employee compensation, service fees, commissions, and prizes or awards for services.

3. Complete the 1099-NEC form: You can either fill out the form by hand or use an electronic filing system. If you’re filling out the form by hand, don’t forget to print legibly and use black ink.

4. Send copies of the form: You'll need to send a copy of the 1099-NEC form to the non-employee in addition to filing with the IRS. The deadline for sending the form to the non-employee is January 31st of the year following the tax year in which the payments were made. The deadline for filing the form with the IRS is also January 31st. (More on filing below!)

5. Keep copies of the form: As the issuer, it’s a good practice to keep a copy of the 1099-NEC form for your records for at least three years (the statute of limitations), but in some cases six years.

How to file a 1099-NEC form

As noted above, you have to send a copy of the 1099-NEC form to your independent contractors no later than January 31st of the year following the tax year in which the payments were made. You can either send the form electronically or by mail. 

If you do decide to send the form electronically, you must also comply with the IRS's electronic filing requirements. This includes obtaining the independent contractor's valid consent, providing them with a statement of the hardware and software requirements for accessing and retaining the electronic form, and keeping a paper copy of the statement and the consent form for your records.

Some independent contractors may prefer to receive a paper copy of the form, so it's a good idea to confirm their preference before deciding how to send the form. Regardless of the path you choose, be sure to do it on time to avoid penalties.

Penalties for not filing a 1099-NEC form

Hopefully this won’t be an issue for you, but if you fail to file the 1099-NEC form by the due date, there are penalties from the IRS.

The IRS recently increased the per form penalties for the 2023 tax year. The penalties depend on when you file the correct information return

• If you file within 30 days of the due date, the penalty is $60 per form, up to a maximum of $630,500 per year.

• If you file more than 30 days after the due date but by August 1, the penalty is $120 per form, up to a maximum penalty of $1,891,500. 

• If you file after August 1 or do not file at all, the penalty is $310 per form, up to a maximum penalty of $3,783,000.

Intentionally disregarding the filing requirements for 1099-NEC forms is different—and higher—than the penalties above. The intentional disregard penalty is $630 per form, with no limit. Also, if you file the 1099-NEC form, but the information is incorrect or incomplete, penalties may also be assessed. Staying on top of your tax paperwork is good business here.

Generate 1099-NEC forms with ease

Understanding the basics of the 1099-NEC form is crucial for anyone who hires and pays non-employees—plus, it can keep you on track with your paperwork, and out of hot water with the IRS.

Onboarding and managing 1099 contractors can be time-consuming and complex, but Found can help you streamline and simplify the entire process, including generating PDFs of 1099-NEC forms for your contractor whose payments exceed $600. With one click, you can export 1099-NECs for the prior tax year. All you have to do is share them with your contractor and the IRS. 

When you’re self-employed, your time and your finances are limited. That’s why Found is on a mission to make self-employment easier. Say goodbye to the stress of managing 1099 contractors, and focus on the more important aspects of running your business. We believe in doing what you love—which probably isn’t paperwork. Sign up for free today.

FAQs about 1099-NEC forms

What if I pay an independent contractor less than $600 in a year? Do I still need to file a 1099-NEC? 

No, you are likely not required to file a 1099-NEC form for independent contractors who were paid less than $600 during the tax year. However, it’s important to have a good recordkeeping system to track your contractor payments to make sure you don’t miss one.

Are there any exceptions to the $600 threshold for filing a 1099-NEC? 

Yes, there are a few exceptions. For example, you generally don't need to file a 1099-NEC for payments made to corporations or tax-exempt organizations (except for legal services), although they may be taxable to the recipient. However, it's always best to consult with a tax professional to ensure you're following the correct guidelines.

Can I file the 1099-NEC form electronically? 

Yes, you can file the 1099-NEC form electronically with the IRS, but you must follow their specific requirements for electronic filing, including obtaining the recipient's consent and providing them with the necessary hardware and software requirements.

Can you handwrite 1099-NEC forms?

The short answer is yes, you can fill out a 1099-NEC form by hand, but it comes with specific instructions from the IRS: Although handwritten forms will be accepted, the IRS prefers that filers type or machine print data entries. Also, filers should insert data as directed by shading, or in the middle of blocks, well separated from other printing and guidelines, and take measures to guarantee clear, dark black, sharp images. Photocopies are not acceptable.

Just because you can do it, doesn’t mean you should. When you use Found’s free contractor management tools, Found will auto-generate 1099-NEC forms for your contractors. All you have to do is file.

What happens if I miss the January 31st deadline for filing the 1099-NEC? 

If you miss the filing deadline to issue a 1099-NEC form, you may be subject to penalties from the IRS. The penalties can range from $60 to $290 per form for 2023, depending on how late the filing is. There are maximum fines per year for small businesses.

Can I file one 1099-NEC form for multiple independent contractors? 

No, you must file a separate 1099-NEC form for each independent contractor who received $600 or more in payments from your business during the tax year.

What information do I need from the independent contractor to complete the 1099-NEC form? 

You'll need the contractor's legal name, address, and taxpayer identification number (TIN) or social security number (SSN). It's a good practice to request a completed W-9 form from the contractor before making any payments.

The information on this website is not intended to provide, and should not be relied on, for tax advice.