As an independent contractor, when you’re hired for a job, you aren’t on the payroll like a traditional full-time employee. The money, commission, or benefits paid to you are considered non-employee compensation. Before the year 2020, Form 1099-MISC was used to report this type of income. Today, the IRS requires non-employee compensation payments to be reported on Form 1099-NEC. Here’s what you need to know about the 1099-NEC if you’re a contractor or an employer.
What’s included on Form 1099-NEC?
IRS Form 1099-NEC is used to report any compensation paid to non-employees by a company.
Note: The IRS separated this income from Form 1099-MISC beginning with tax year 2020 (returns filed in 2021).
There are five sections on Form 1099-NEC. Those are:
- Payer’s information
- Recipient’s information
- Non-employee compensation amount
- Federal income tax withheld
- State information
Non-employee compensation will be reported in Box 1.
Box 4 will report any federal income tax withheld. This box should be blank unless you had backup withholding.
Box 5 will report any state income tax that was withheld from the compensation.
The 1099-MISC was redesigned in 2020 to reflect the changes mentioned above. The biggest update to the form was made to Box 7, which was used for reporting non-employee compensation. Now Box 7 reports direct sales of $5,000 or more.
Who receives a 1099-NEC?
Form 1099-NEC is sent out to independent contractors (non-employees) who’ve earned more than $600 from a single client or business. So, if you’ve had many clients throughout the year, you may receive multiple 1099s. Different employment types may receive a 1099-NEC to file their taxes, including:
- Sole proprietors
- Freelancers
- Independent contractors
- Self-employed individuals
What is non-employee compensation?
Non-employee compensation is defined as money paid to an independent contractor for work performed, and it’s typically considered self-employment income. Common examples include:
- Fees
- Commissions
- Prizes
- Awards for services
- Other forms of compensation for completing tasks
The IRS requires a business to report non-employee compensation when the following conditions are met:
- They’ve made payments to someone who isn’t a W-2 employee, and those payments total at least $600 for the year.
- The payments were for services rendered during trade or business.
- Payments were to an individual, a partnership, an estate, or a corporation (in some cases).
What do I do if I don’t receive Form 1099-NEC?
If you haven’t received your form by February 1, contact the company you performed work for directly to request it. You will need the form to file your taxes by the filing deadline, so you should contact the company as soon as possible.
1099-NEC vs 1099-MISC: What’s the difference?
Prior to 2020, Form 1099-MISC was used to report payments, including non-employee compensation. Beginning with tax year 2020, non-employee compensation is no longer reported on Form 1099-MISC. Instead, employers should use Form 1099-NEC.
Now, Form 1099-MISC is used to report miscellaneous payments that aren’t subject to self-employment tax like rent, royalties, prizes and awards, substitute payments in lieu of dividends.
It’s possible to receive both a 1099-NEC and a 1099-MISC in the same tax year. For example, if you’re an independent contractor in your profession but you also collect rent for a property you own, you would expect to get both forms. You’ll need to report the income information from all 1099s on your Form 1040.
How to file 1099-NEC
- Review your 1099s: Make sure your personal information is accurate and up to date. Also, double-check that the total payments you received are correct. If you notice any discrepancies, contact the payer to correct them.
- Report your 1099 income on your tax return: If all your 1099s are correct, you can report your income on your Schedule C or E, depending on your business. Always file your return by the Tax Day deadline or request an extension if you need more time.
- Pay taxes: You must pay outstanding taxes or fees when you file. If you can’t pay the full amount, the IRS offers a number payment plans to fit your budget.
- Keep your tax forms: It’s important to keep 1099s and other forms to track your income. The IRS recommends keeping records for at least three years after you file.
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I’m a business owner. Do I need to file Form 1099-NEC for my workers?
All businesses are required to file Form 1099-NEC form for non-employee compensation if the following conditions are met:
- You paid someone who is not your employee
- You paid for services rendered during trade or business (including government agencies and nonprofit organizations)
- You paid an individual, a partnership, an estate, or, in some cases, a corporation
- You paid at least $600 to the individual during the tax year
You must file Form 1099-NEC for anyone whom you set up backup withholding for, even if the amount was less than $600.
Employers are required to send Form 1099-NEC to the taxpayer and file a copy with the IRS by February 1st. You can download a blank copy of Form 1099-NEC here.
What are the other types of Form 1099?
| Type of 1099 | Purpose of Form |
| 1099-A Acquisition or Abandonment of Secured Property Due to Recipient: January 31st | A lender or bank will issue Form 1099-A to report the foreclosure of a property. The former property owner will use Form 1099-A to calculate the capital gain or loss on the property. Depending on the type of loan, the taxpayer will utilize either the property’s fair market value (FMV) or the outstanding loan balance on the property for the selling price. Typically, your 1099-A will report both figures. |
| 1099-B Proceeds from Broker and Barter Exchange Transactions Due to Recipient: February 15th | Investment transactions, like sales and trades on stock, bonds, and other commodities, are typically reported to you on Form 1099-B. Depending on the length of the holding period, the capital gain is considered either short-term or long-term. This will determine the rate at which this income is taxed. If the exchange resulted in a capital gain or a loss, it should be reported on your tax return. Your net capital loss is deductible up to $3,000, depending on your filing status. |
| 1099-C Cancellation of Debt Due to Recipient: January 31st | The lender of a credit or loan may choose to forgive or discharge your debt for less than the full amount you owe. The forgiven amount of debt is considered canceled. Erasing the debt completely or partially will cause the issuance of Form 1099-C. This typically occurs for reasons such as not being able to collect the money after many attempts, foreclosures, repossessions, transfers, or abandonment of property. If you have a debt canceled by a creditor, the amount of canceled debt is likely to be added to your taxable income. The information on this form will need to be included in your return, and your tax refund/liability will be impacted as a result. |
| 1099-INT Interest Income Due to Recipient: January 31st | When you receive income in the form of interest or dividends, you will be sent a form 1099-INT to report that income. The threshold here is low. Any institution that pays you more than $10 in interest during the course of the year will be required to send you this form by the end of January. For taxpayers who exceed $1,500 in interest income during the course of the year, it will be necessary to complete Schedule B. On this form, you will need to indicate the name of each payer, along with the amount of interest paid by each. |
| 1099-G Certain Government Payments Due to Recipient: January 31st | If you receive payments from the government, it is likely that you’ll receive a Form 1099-G to document those payments. The income represented on this form is going to be added to the taxable income you report. Unemployment benefits are the most common example of reasons you would receive a 1099-G. If you have been paid unemployment benefits by your state during the year, those benefits are subject to income tax. It is likely that taxes were withheld from those benefits, but it is still necessary to report this income on your annual return. You may also receive a 1099-G if you received a refund on your previous year’s state income tax return. |
| 1099-MISC Miscellaneous Income Due to Recipient: January 31st | Form 1099-MISC is primarily used to report miscellaneous payments that aren’t subject to self-employment tax. Examples of such payments include rent, royalties, prizes and awards, substitute payments in lieu of dividends, or other payments that don’t count as non-employee compensation. |
| 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Due to Recipient: January 31st | If you are taking money out of your IRA before you have reached retirement age, it is likely that this money will be taxable. In this case, withdrawals will be reported on Form 1099-R. You may also be sent a 1099-R when you accept other forms of distribution from accounts like pension plans and annuities. Plan your expected tax liability accordingly. It is possible that reporting these withdrawals will reduce the amount of your refund or it will increase the amount of money you owe as part of your return. |
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