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Summary: Whether you work as an independent contractor or freelancer or hire them in your business, you need to know about Form 1099-NEC. This form is used by businesses to report payments made to non-employees, including freelancers, independent contractors, and sole proprietors who provided a service during the tax year.
What is Form 1099-NEC?
Form 1099-NEC is part of the IRS’s 1099 information returns. Starting with the 2020 tax year, the IRS began requiring businesses to report non-employee compensation on Form 1099-NEC, instead of using Box 7 on Form 1099-MISC as in past years.
It does not replace Form 1099-MISC entirely. Rather, Form 1099-MISC is still used for payments like rents, royalties, and certain legal fees. Form 1099-NEC is specifically for reporting fees paid to individuals or entities doing work for you, without being on your regular payroll.
What is non-employee compensation?
Non-employee compensation refers to any payments your company makes to an independent contractor for services. Examples can include consulting fees, commissions, awards, and other types of payment.
Unlike payments to employees, you generally don’t withhold any taxes (income, Social Security, or Medicare) from an independent contractor’s earnings. Employees receive a W-2 showing their wages and withheld taxes. Contractors, however, receive a 1099-NEC reporting what was paid, and they’re responsible for remitting their own taxes.
Who needs to file 1099 NEC?
Your business should file Form 1099-NEC for any contractor if:
- They’re not classified as your employee.
- The payment was made for services connected to your business activities.
- The entity is an individual, single-member LLC, partnership, or LLC taxed as a partnership.
- You paid the contractor $600 or more during the tax year.
You’ll also submit a 1099-NEC if you withheld any federal income tax under backup withholding rules, even if the total was under $600. You don’t file a 1099-NEC for corporations or for payments made via credit cards or third-party processors (those are reported on Form 1099-K).
When do you need to file 1099 NEC?
Copy B must be sent to the contractor, and Copy A must go to the IRS, by January 31 each year. If the due date falls on a weekend or holiday, it moves to the following business day.
Penalties apply for missing the deadline, ranging from $50 to $580 per form, depending on how late you file. If you intentionally avoid filing, you face a $550 penalty per form, with no upper limit.
How to file Form 1099-NEC
Completing Form 1099-NEC is straightforward. You’ll need:
- Your business’s name, address, phone, and taxpayer ID number
- The contractor’s name, address, and taxpayer ID number
- The total non-employee compensation for the year
- Any federal tax you withheld under backup withholding
- State details if applicable (like state income tax withheld, the contractor’s state ID, and the compensation amount)
Use an IRS-approved Copy A (scannable form) or file electronically via the FIRE system. If you paper-file, you must attach Form 1096 as a cover page. No Form 1096 is needed if you e-file.
Why would I receive a 1099 NEC?
If you do contract or freelance work, any business that paid you $600 or more in a given year should send you a 1099-NEC by January 31.
However, payments made via credit cards or services like PayPal are reported on Form 1099-K instead. The IRS also gets a copy of your 1099-NEC, so they expect to see that income on your tax return.
How is 1099-NEC different from 1099-MISC?
Though Form 1099-NEC existed in the 1980s, the IRS began using 1099-MISC for non-employee compensation starting in 1983. That process continued until the PATH Act of 2015 created different deadlines for 1099-MISC, leading to confusion over due dates. In response, the IRS reintroduced Form 1099-NEC in 2020 specifically for reporting contractor payments.
Form 1099-MISC remains in use for other miscellaneous income like rents and royalties. Form 1099-NEC covers non-employee compensation (and certain direct sales of consumer products totaling $5,000 or more).
Detailed requirements are included in the IRS Instructions for Forms 1099-MISC and 1099-NEC.
What else do you need to know about 1099-NEC?
If you hire freelancers, it’s wise to request a W-9 from them before you send any payments. Form W-9 collects their name, address, taxpayer ID, and business status, plus confirms whether they’re subject to backup withholding. Having these deta
Bottom line
Whether you receive a 1099-NEC or issue it to your contractors, maintaining up-to-date, accurate records is vital when preparing your taxes. Tracking payments carefully and staying informed about filing rules will help your business avoid errors and penalties.
Charlotte is an Human Resources Information Systems and Martech expect, Charlotte has worked for major brands in the industry including FactorialHR and Tooltester. Originally from Manchester, UK, with a Bachelor's degree from the Manchester Metropolitan University, Charlotte currently lives in Barcelona, Spain.
