What is Form 1099-NEC?

What is Form 1099-NEC?

The NEC in Form 1099-NEC represents nonemployee compensation. From a business perspective, non-employee compensation is any compensation you pay to a worker that you classify as an independent contractor rather than an employee. Specifically, companies must provide contract workers with a Form 1099-NEC if they paid them US$600 or more for their services in a given tax year.

From a worker’s perspective, non-employee compensation, also known as self-employment income, is any payment received for work performed as a freelancer or independent contractor rather than as an employee. The employee’s income is reported on Form W-2. Some workers who are employees of a company and do self-employment on the side will receive W-2 and 1099-NEC forms. Individuals must declare all of their income, regardless of source, when filing their taxes.

Why is Form 1099-NEC being returned?

Some contractors and employers may remember Form 1099-NEC. This form has been out of use since 1982. Since then, companies have used Box 7 on Form 1099-MISC to report nonemployee compensation. So why did the IRS reintroduce Form 1099-NEC this year? There are two main reasons for this change.

The rise of the gig economy

Freelance work has become increasingly common, with more and more professionals in the United States doing this type of work each year. Some workers engage in parallel self-employment in addition to a more traditional salaried position, while others are fully self-employed. Self-employment can vary widely from casual, unskilled labor to expert consulting services.

Growth projections suggest that, by 2027, just over half of American workers will be self-employed. The increased prevalence of companies paying, and workers receiving, non-employee compensation necessitated a dedicated form for this type of income rather than just a box on a miscellaneous form.

Simplification of the filing deadline

Another main reason for this change was to avoid the previous confusion caused by separate filing deadlines for reporting compensation for employees and non-employees. Employers are required to file Form W-2 for prior year employee compensation on January. 31 annually. However, the deadline for filing Form 1099-MISC was two months later. This significant discrepancy has sown confusion and given way to tax evasion.

In 2015, the IRS attempted to address the issue with the Protecting Americans from Higher Taxes (PATH) Act. This legislation aligned the deadline for reporting nonemployee income in box 7 of Form 1099-MISC with the deadline for Form W-2 but left the later deadline for other parts of Form 1099-MISC. Rather than solving the problem, this further puzzled many registrants as they had two different deadlines for parts of the same form.

The reintroduction of Form 1099-NEC is the most recent solution. Form 1099-NEC has a single filing deadline, and that deadline aligns with Form W-2. So now employee and non-employee incomes share the same reporting deadline and they each receive their tax form.

Form 1099 NEC vs 1099-MISC – what’s the difference?

What is the difference between 1099-NEC and 1099-MISC? Forms 1099-NEC and 1099-MISC are both used to report income to the IRS. However, they differ in the types of income they cover:

  • Nonemployee Compensation: Form 1099-NEC is the new form used to report nonemployee compensation. If a business is paying workers for their services and the workers are not W-2 employees, then the business will use Form 1099-NEC. This form is entirely dedicated to the declaration of payments to temporary workers.
  • Miscellaneous Income: Form 1099-MISC serves as a catch-all for various forms of income that do not fit on other tax forms. Previously, this included non-employee compensation, which was listed in Box 7 of the form. Now, companies will no longer use Form 1099-MISC to report non-employee compensation. Form 1099-MISC, which is now titled Miscellaneous Information, will continue to be used for various forms of income, but box 7 is now dedicated to reporting direct sales of at least US$5,000.

Forms 1099-NEC and 1099-MISC share the fact that, at various times, they have each been used to report nonemployee compensation. However, at the moment, the only thing they have in common is that they both belong to the 1099 category of tax forms, used to report non-employment-related income. In this category, Form 1099-NEC and Form 1099-MISC are used to report entirely different types of income.

Who must complete Form 1099-NEC?

If your business paid US$600 or more to a non-employee in a given tax year for services rendered to your business, then you must file a Form 1099-NEC. Note that this does not apply to international contractors based outside of the United States

According to the IRS, payments to nonresident aliens must be reported on Form 1042-S, Foreign Persons’ US Source Income Subject to Withholding. As you would Form 1096 with Form 1099, in this case, you must complete Form 1042 with Form 1042-S.

For US workers, Form 1099-NEC applies whenever you pay a non-employee. Non-employees can be anyone you have hired on a contract basis to carry out a project for your business. This could include, for example, a freelance writer who regularly works for your company or an expert who came to consult on a specific project. He can also be a lawyer whose services you have retained. If the worker is not on your payroll, then the person is not your employee and should receive a 1099-NEC form rather than a W-2 form.

In some cases, rather than hiring an individual contractor, you may have contracted a corporation, estate, or partnership to complete the work for your business. In these cases, you can still use a Form 1099-NEC to report these payments. Note that compensation for non-employees does not always take the form of direct payment for a service. Non-employee earnings may also include fees, benefits, or commissions.

All self-employed individuals who contracted their services and received at least $600 from a client should receive a Form 1099-NEC. They must report this income when they file their income taxes.

Who Should Complete Form 1099-MISC?

Form 1099-NEC only replaced box 7 on Form 1099-MISC, so there are still many instances where you might complete this miscellaneous income form. However, if you are wondering if you can use 1099-MISC instead of 1099-NEC, the answer is no. You can only use the 1099-MISC to report other types of non-employment income. Here are some examples of income that would require the filing of Form 1099-MISC:

  • Royalty fee
  • Rent payments
  • Prizes or awards
  • fishing boat product
  • Crop insurance proceeds
  • Medical or healthcare payments
  • Gross proceeds paid to lawyers
  • Substitute dividends and tax-exempt interest payments

As with Form 1099-NEC, $600 is the threshold that requires reporting of income on this form, except for royalty payments. Any royalties of $10 or more must be reported on Form 1099-MISC. The IRS provides detailed information on what types of income should be included on Form 1099-MISC. If there is no other tax form dedicated to the type of payments you need to report, then Form 1099-MISC should be the form you use.

How to Complete Form 1099-NEC for Independent Contractors

If you employ a temporary worker and need to complete Form 1099-NEC, you will need to include the following information on the form:

  • Your business identification information: Include the legal name and address of your business and your tax identification number (TIN).
  • The recipient’s identification information: Also include the recipient’s name, address, and TIN or social security number.
  • Amount of compensation: In box 1, enter the total amount of non-employee compensation you paid to the beneficiary during the previous tax year.
  • Withholding Information: If applicable, note any federal income tax or state income tax withholding.

The form also gives you space to report state income earned and provide your business tax identification number. You do not need to report this information to the IRS, but you may include it on the form as a courtesy to the recipients, as it makes it easier for them to complete their state tax returns.

The IRS encourages businesses to file Form 1099-NEC electronically using the File Information Returns Electronically (FEU) system. If you file 250 or more information returns in the same year, then you are legally required to file electronically. E-filing involves creating the file electronically from the start – you can’t scan a PDF copy, for example.

Filing a Form 1099-NEC should involve sharing the form with all relevant parties:

  1. IRS: First, copy A of Form 1099-NEC must be sent to the IRS. In addition to Form 1099-NEC, you will also need to submit Form 1096, Annual Summary and Transmission of United States Information Returns, which shows the total dollar amount of all contractor payments.
  2. State Department of Revenue: Some state tax departments require that you also send them a copy of the form. Check your state’s requirements to see if this step is necessary. If so, you will send copy 1.
  3. The Contractor: Contractors should also receive a copy of the form — Copy B — so they can use it to file their income taxes. Copy 2 provides contractors with their state filing information.
  4. Your Records: Finally, you should retain copy C for your company records. You will need this payroll expense information to file your business tax return.

The IRS will compare the information you provided with the contractor’s tax return, so you must report payments accurately.

Do companies need to file both 1099-MISC and 1099-NEC?

Some companies will need to complete both Form 1099-MISC and Form 1099-NEC – in some cases for the same worker, although this is rare.

The forms you need to complete depending on the type of payments your business has to report to the IRS. For example, if your business employs contractors and holds a contest or drawing with cash prizes, you will likely need to complete both forms to report these different types of payments. If you need to file both types of 1099 forms, you must file a separate 1096 form for each type of form.

In many cases, businesses that used to file Form 1099-MISC to report payments to contractors will now simply switch to Form 1099-NEC. It is no longer necessary to use Form 1099-MISC to report non-employee compensation – this form is only relevant for your business if you need to report a miscellaneous type of payment included in this form.

What are the filing deadlines for Forms 1099-NEC and 1099-MISC?

When completing Form 1099-MISC or 1099-NEC, be sure to submit it before the deadlines, which are as follows:

  • Form 1099-NEC Deadline: Form 1099-NEC is due in January. 31 of the year following the tax year covered by the form. This deadline is the same for paper or electronic filing. When Jan. 31 falls on a weekend or holiday, the deadline moves to the next business day. In 2021, for example, this made the actual deadline Monday, February 1 . Businesses must submit the form to the IRS and contractors by then.
  • Form 1099-MISC Deadline: The deadline for filing Form 1099-MISC with the IRS is March 1 if you are filing on paper or March 31 if you are filing electronically. However, businesses must send Form 1099-MISC to recipients by January 1. 31 — or a little later in the event of a weekend or holiday.

Failure to issue the forms within these time frames may result in penalties from the IRS, ranging from US$50 to US$270 perform to a maximum of US$556,500 in the same year. The amount of the penalty will depend on the lateness of the form, although you could incur even more severe fines of at least $550 perform if the failure to report is not accidental but is a willful disregard of the requirement.

Globalization Partners helps you simplify international payroll

Paying workers in your home country and properly navigating tax laws can be difficult enough. For international companies, payroll and taxes can become exponentially more complicated. If legal compliance and HR logistics are taking the focus away from your core competencies, it’s time to outsource those critical tasks to experts.

Globalization Partners offers international payroll services so you can focus on achieving your business goals, without the stress and complications that can come with international employment. With an in-country Employer of Record (EOR), you can ensure legal and tax compliance in all aspects of the employment process and rest assured that your workers are properly classified.

By aamritri

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