Filing Form 1099-NEC accurately is crucial for reporting payments to freelancers and avoiding IRS penalties. This guide for small business owners simplifies the process to help you stay compliant and manage your finances effectively.
One of the most important things for small business owners is ensuring all payments are reported correctly, especially when you’re paying freelancers or independent contractors. Central to this process is IRS Form 1099-NEC, vital for reporting non-employee compensation, such as payments of $600 or more made to freelancers or independent contractors.
Before you can give out 1099 forms to these contractors, it’s important to understand who qualifies as a contractor and the specifics of the form.
This blog will guide you through everything you need to know about Form 1099-NEC—from identifying who needs one to filing it correctly. For independent contractors, ensure your employers are aware of the need to issue your 1099-NEC on time.
Let’s walk through the essentials of Form 1099-NEC to help you manage your filings correctly and on time, keeping you safe from potential fines and penalties.
What is Form 1099?
Form 1099 is a series of documents used by the U.S. Internal Revenue Service (IRS) to report various types of income other than wages, salaries, and tips, which are reported on Form W-2.
With multiple versions available—such as 1099-NEC, 1099-MISC, 1099-DIV, among others—it’s easy to get confused. Each version is designed to report specific types of transactions.
Further reading: 1099-NEC vs 1099-MISC: Differences, Deadlines, and How-To’s.
Form 1099-NEC
Form 1099-NEC is crucial for businesses as it covers all payments of $600 or more made to freelancers, independent contractors, and other non-employees. This includes fees, commissions, prizes, and awards for services performed by those not on your payroll. It ensures the IRS can track earnings that may not be subject to regular payroll taxes, thus providing a way to collect appropriate taxes from self-employed individuals and independent contractors.
Note that starting in the tax year 2020, Form 1099-NEC replaced Form 1099-MISC for reporting payments made to independent contractors. Before 2020, Form 1099-MISC was used to report non-employee compensation, such as fees, commissions, or other payments made to independent contractors. Now, this type of income must be reported on Form 1099-NEC.
Who should file Form 1099?
As a small business owner, you are required to file 1099 information returns for each vendor, service provider, freelancer, independent contractor, or non-incorporated business for which you’ve paid over $600 during the tax year.
This rule applies to business entities such as limited liability companies (LLCs), partnerships, and sole proprietorships. However, it does not extend to C or S corporations.
Here are key exemptions to keep in mind:
- Payments under $600: If your total payments to a vendor or contractor don’t exceed $600 for the tax year, you are not required to file a 1099 for them. However, the contractor is still responsible for reporting this income on their own tax returns.
- Renting through a property manager: If you rent business space through a property manager, you don’t need to file a 1099 for these payments. Property managers handle their own 1099 filings and submit them to the property owners.
- Payments to C or S corporations: You do not need to file a 1099 for services purchased from C or S corporations.
- Hiring employees: If you have hired someone as an employee rather than a contractor or a freelancer, you must use Form W-2 instead of a 1099. Misclassifying an employee as an independent contractor to circumvent taxes or employee benefits can lead to significant legal penalties.
Who qualifies as an independent contractor?
If you’re new to hiring contractors, it’s crucial to understand who qualifies as an independent contractor versus a full-time employee. Misclassifying someone—like issuing a 1099 when a W-2 is required—can lead to serious tax filing errors, resulting in penalties from the IRS. Proactively managing contractor payments will help you avoid such penalties and make tax season go smoothly.
Further reading: 1099 vs. W-2 forms: What’s the difference for employers?
If you are a freelancer or independent contractor, make sure your information is accurately reported to the IRS and that you receive the correct compensation.
Independent contractors are individuals or entities hired to perform specific tasks or services, operating independently from your business. Unlike employees, they are responsible for their own taxes and typically receive a Form 1099-NEC if paid $600 or more in a year. This form serves to report their income to the IRS, whereas a W-2 is used for employees, detailing wages and taxes withheld by the employer.
This blog focuses solely on the 1099-NEC form. We’ll cover everything you need to know about identifying your contractors, filling out the 1099-NEC form, and submitting it properly. Let’s make tax season a breeze and keep your business compliant with IRS regulations.
Steps to file Form 1099-NEC
1- Gather the required information
Before you can complete and submit a 1099-NEC form, you’ll need to gather specific information for each independent contractor you’ve paid during the tax year.
Start by collecting a completed Form W-9 from each independent contractor you’ve hired. The W-9 form will provide you with essential details such as the contractor’s legal name, address, and Taxpayer Identification Number (TIN), which may be their Social Security Number (SSN) or another number if they are a Non-Resident or Resident Alien.
Refer to your bookkeeping records to confirm the total amount paid to each contractor over the tax year. This step is crucial to ensure that the amounts reported on the 1099-NEC forms are accurate.
2- Get the forms
You can’t print 1099 forms off the internet; you need to get official forms from a recognized source. Here are a few places where you can get them:
- From the IRS: Order 1099 forms directly from the IRS by visiting their website or calling 1-800-TAX-FORM (1-800-829-3676).
- From an office supply store: You can buy packets of 1099-MISC forms at your local office supply store or order them online from the store’s website.
- From an accounting firm: Local accounting firms usually have these forms available for purchase. If you work with an accountant, they can also provide you with the necessary forms.
3- Fill your 1099 forms
With the information gathered from the W-9 forms and your payment records, fill out a 1099-NEC form for each contractor. This form requires you to list the total amount paid to the contractor during the tax year along with their legal name, address, and TIN.
3- Submit Copy A to the IRS
After gathering all the required information and filling out Form 1099-NEC, the next step is to submit Copy A to the IRS.
If you file a physical Copy A of Form 1099-NEC with the IRS, you’ll also need to complete and submit Form 1096. The IRS uses Form 1096 to keep track of all the physical 1099 forms you’re submitting for the year.
To file a physical copy A, you need to:
- Obtain Form 1096: Just like Form 1099-NEC, you need to get the official Form 1096 from the IRS or an authorized vendor.
- Complete Form 1096: Fill out Form 1096 with the total number of 1099 forms you’re submitting and other required information.
- Mail Form 1096: Submit Form 1096 along with Copy A of each 1099-NEC form to the IRS. Ensure you meet the January 31 deadline to stay compliant.
If you prefer filing electronically, you can use the IRS Filing Information Returns Electronically (FIRE) system. This method is faster and helps reduce the chances of errors.
To use the FIRE system, follow these steps:
- Request a Transmitter Control Code (TCC): Submit Form 4419 to the IRS at least 30 days before the 1099 deadline to get your TCC.
- Create a FIRE system account: Set up an account on the FIRE system.
- Complete your 1099s: Use supported accounting or payroll software to fill out your 1099 forms.
- Submit the forms: Upload the completed 1099s in the correct format through the FIRE system.
4- Submit copy B to the independent contractor
After completing Form 1099-NEC, you need to send Copy B to each of your independent contractors by January 31. This allows them to include it in their personal tax returns and accurately report their yearly income. Missing this deadline can result in fines from the IRS.
You can download and print Copy B from the IRS website. This printable version is convenient and ensures that you provide the correct information to your contractors.
You can also email Copy B to your contractor, but you must first get their consent. Consent must be obtained in a way that shows the contractor can receive the form electronically. If you plan to email them, request consent via email.
To meet IRS requirements, your request for consent must include:
- Confirmation that if the recipient does not consent to an electronic copy, they will receive a paper one.
- The scope and duration of their consent, such as whether it covers just this year or every year they work for you.
- Instructions on how to request a paper copy, even if they have already consented to electronic delivery.
- Instructions on how to withdraw consent, which can be done at any time in writing, electronically, or on paper. You must also confirm their withdrawal in writing.
- Conditions under which the statement will no longer be provided, such as if the contractor’s contract is canceled or if you end up paying them less than $600.
- Procedures for updating their information with you.
- A description of the hardware and software needed to view and print the form.
- A date when the form will no longer be available, for instance, if it’s being removed from your company’s website.
- Once you have the contractor’s consent, you can send them Copy B electronically. Some payroll services, like Gusto, can handle this process for you by automatically requesting electronic filing consent from your contractors.
5- Check if you need to submit 1099 forms with your state
In addition to federal filing requirements, some states also require you to submit 1099 forms.
Filing requirements for 1099 forms vary by state. Some states require you to submit copies of the 1099 forms to the state tax authority, while others do not.
To ensure compliance with state regulations, check in with your Certified Public Accountant (CPA). They can provide specific guidance based on your state’s requirements.
Make sure you understand and meet all state filing deadlines to avoid penalties. Your CPA can help you stay on top of these deadlines and ensure you’re filing correctly.
How to fill Form 1099 online
Copy A
To e-file Copy A of Form 1099-NEC, use the IRS FIRE (Filing Information Returns Electronically) system. This requires compatible accounting software to generate the form.
Before using FIRE, you need to obtain a Transmitter Control Code (TCC). Request a TCC by completing Form 4419 and mailing or faxing it to the IRS. Make sure to submit this form at least 30 days before the filing deadline for your Form 1099-NEC. Once you receive your TCC from the IRS, you can use it to set up an account with FIRE.
Copy B
You can email Copy B to your contractor, but you must first get their consent. Consent must be obtained in a way that shows the contractor can receive the form electronically. If you plan to email them, request consent via email.
To meet IRS requirements, your request for consent must include:
- Confirmation that if the recipient does not consent to an electronic copy, they will receive a paper one.
- The scope and duration of their consent, such as whether it covers just this year or every year they work for you.
- Instructions on how to request a paper copy, even if they have already consented to electronic delivery.
- Instructions on how to withdraw consent, which can be done at any time in writing, electronically, or on paper. You must also confirm their withdrawal in writing.
- Conditions under which the statement will no longer be provided, such as if the contractor’s contract is canceled or if you end up paying them less than $600.
- Procedures for updating their information with you.
- A description of the hardware and software needed to view and print the form.
- A date when the form will no longer be available, for instance, if it’s being removed from your company’s website.
Once you have the contractor’s consent, you can send them Copy B electronically.
The bottom line
Filing Form 1099-NEC accurately and on time is crucial for paying non-employees correctly and to comply with IRS regulations. Failing to do so can result in hefty fines and penalties, straining your financial resources and damaging your business’s reputation.
However, managing and filing these forms on your own can be challenging, especially with the numerous responsibilities you already juggle as a small business owner.
That’s where CoCountant comes in. With our comprehensive bookkeeping and accounting services, you can rest assured that accurate financial records (including payroll transactions) are maintained, payroll calculations comply with federal, state, and local laws, and payroll reports are generated accurately. This includes handling the complexities of 1099 filings and specialized payroll services so that both your in-house team and contractors are always paid correctly and on time.
FAQs
Do LLCs receive 1099 forms?
Yes, LLCs can receive 1099 forms if they are paid $600 or more for services provided. However, if the LLC is taxed as a corporation, it typically does not receive a 1099 form.
What is a 1099 form used for?
A 1099 form is used to report different types of income to the IRS. This includes income earned by independent contractors, interest and dividends from investments, and other miscellaneous income.
How to get a 1099 form?
You can get a 1099 form from the IRS website or order physical copies from the IRS. Some accounting software also allows you to generate and file 1099 forms electronically.
What is a 1099 tax form?
A 1099 tax form is used by the IRS to track income that is not typically included on a W-2 form, such as payments to independent contractors, interest, dividends, and other miscellaneous income. It helps ensure that all income is reported and taxed appropriately.