Tax season is here, and that means it’s time to learn or better understand the different tax forms that the IRS requires when filing your tax return. One of those is the 1099 NEC Form. If you’re not familiar, Form 1099-NEC is the IRS form businesses use to report payments (of at least $600 for the entire year) made to independent contractors, freelancers, self-employed individuals, and sole proprietors. All of these types of payments are considered “nonemployee compensation” because a contractor or freelancer is technically not an employee of the business that’s paying them. Form 1099-NEC is one of several 1099 tax forms, which also include 1099-INT (for interest income), 1099-MISC (for miscellaneous income), and 1099-DIV (for dividend and distribution income).
Let’s take a closer look at Form 1099-NEC and answer some of the questions you may have.
What does nonemployee compensation mean?
Nonemployee compensation, as we mentioned, is payment made to workers who are not employees of the business that is paying for the service being provided. These self-employed individuals are usually independent contractors and freelancers. Some examples of nonemployee compensation include:
- Fees paid to independent contractors, freelancers, consultants, and other self-employed workers
- Money paid to attorneys for providing legal services
- Professional service fees, such as fees to accountants, architects, contractors, and others
- Commissions paid to nonemployee salespeople that are subject to repayment but not repaid during the calendar year
Nonemployee compensation does not, however, include payment used with different forms, such as 1099-MISC, or employee wages that are reported on Form W-2.
Who can file the 1099-NEC form?
If a business pays at least $600 to a nonemployee during the course of a year, it needs to file a 1099-NEC form. If you are self-employed and were paid more than $600 by a business for your services, you will receive Form 1099-NEC from that business for you to include in your tax return. The payer typically needs to file Form 1099-NEC by January 31 so the nonemployee can include it in their tax return.
What information does the 1099-NEC form require?
Both the payer/business and the payee/nonemployee must provide certain information on Form 1099-NEC. This includes:
- Payer’s information, including the business name, address, and taxpayer identification number.
- Nonemployee/recipient information, such as name, address, and taxpayer identification number (which may be a Social Security number or an employer identification number, known as an EIN).
- Total nonemployee compensation, which is the total sum of money paid to the nonemployee during the tax year. This number will be the gross amount, before any taxes are subtracted.
- Federal income tax withheld, which usually does not apply to nonemployee compensation. Why? Because businesses typically do not withhold federal income tax from 1099 contractors or freelancers. Self-employed individuals must pay the IRS estimated taxes throughout the year instead of having their taxes taken out of each paycheck as a regular employee would.
- State information, but only if state taxes were withheld from your paycheck. In this case, the business needs to include their state identification number, the nonemployee’s state, and the amount of state income tax that was withheld.
How do you file form 1099-NEC?
The process begins with the business/payer filling out the form and sending it to the contractor/freelancer. The business receives this information from the employee via a W-9 form, usually just before the contractor begins doing work for the business. Form 1099-NEC can be found on the IRS website, which keeps the most recently updated form available at all times. Like other 1099 forms, there are multiple copies that must be sent by the business–Copy A is sent to the IRS, Copy 1 goes to your state’s tax department, you as the contractor/freelancer receive Copy B and 2, and Copy C is kept by the business for their tax records.
What are the potential penalties for filing incorrectly?
If a business does not issue Form 1099-NEC to the IRS and the recipient’s state tax department by January 31, the business may be forced to pay a penalty. That penalty can vary between $60 and $310 per each late or unfiled form. However, if a business intentionally ignores the requirement to provide an accurate 1099-NEC form, the penalty is much more severe–a minimum of $630 per unfiled form or up to 10% of the income reported on the form, with no limit to the penalty. If you own a business that provides nonemployee compensation, it’s a good idea to comply with the filing rules.
If you’re self-employed and do not receive your 1099-NEC form from the business or businesses you provided service to in time to file your taxes, it is recommended you estimate and report your nonemployee compensation to the best of your knowledge. That said, you may be fined if you under-report or inaccurately report your tax liability.
On the other hand, if you do receive your Form 1099-NEC and you intentionally do not include this income on your tax return, you may also face a penalty. If you received the 1099-NEC form, that means the IRS has as well, so they know about your 1099 income. And if you don’t report it on your tax return, they will know that too. And they might make you pay heavily. The IRS can impose a penalty that equals 20% of your underpayment. Let’s look at an example: If the failure to include your 1099 income caused you to understate your tax liability by $10,000, your penalty could be $2,000 ($10,000 x .20 = $2,000) if the IRS decides that it was a substantial understatement of income tax. And that $2,000 is on top of the taxes you still owe on your 1099 income.
Final thoughts on the 1099-NEC nonemployee compensation form
Tax documents and rules can certainly cause confusion, especially when you’re dealing with a variety of these forms. The 1099-NEC form, however, is fairly straightforward whether you’re a business or a self-employed individual. As a business, be sure to keep accurate records of your nonemployee compensation payments to freelancers, contractors, and others who are providing services as nonemployees. That way, when it’s time to file Form 1099-NEC with the IRS, state tax department, and recipient, you’ll have no problem doing so.
As a freelancer, independent contractor, or otherwise self-employed individual, keep your own records of invoices sent to the business, direct deposit or pay stubs received by the business, and any other billing information. Look out for your 1099-NEC form from the payer sometime in February. If you do not receive one by March, reach out to the business and ask them to provide another so you have time to receive it in time to file your tax return in April.
If you prefer to just hand all of these invoices and records over to the professionals, stop by Sun Loan and ask our tax experts to help you out this tax season! With over 20 years of tax prep experience, our experts can take on your tax return and file it accurately while making sure you get the best refund possible. We offer three convenient tax preparation options:
- In-Person: Visit one of our more than 200 neighborhood branches for custom assistance and answers to your tax questions. Just bring your tax forms, a Social Security number, and photo ID to your local Sun Loan branch, and we’ll prep your return. From there, simply review your tax return, sign off, and we’ll file it electronically for you.
- Online: Call or drop by your branch for a secure document upload link, then scan and upload your tax documents. Next, just review your tax return and sign electronically from home, and we’ll handle the rest!
- Drop-Off: Bring your tax forms, a Social Security Number, and photo ID to your local Sun Loan branch, review and e-sign your completed tax return from home, and we’ll file the return for you. We’ll let you know when we’re done so you can stop in to pick up your documents!
Sun Loan is ready to help you prepare for tax season and answer your tax questions, so come by or visit us online to get started!
