The Purpose of Filing Form 1099-NEC
Beginning in 2020, the 1099-NEC started being used to report payments of $600 or more to service providers — typically work done by an independent contractor who is a sole proprietor or member of a partnership. Examples include graphic designers, Web developers, cleaning professionals, freelance writers, landscapers and other self-employed individuals. Basically, the 1099-NEC form is to independent contractors what the W-2 is to employees.
The 1099-NEC captures non-employee compensation, in addition to documenting that you didn’t deduct any federal, state or other taxes. Unlike employees with W-2s, independent contractors get their full pay without any automatic deductions. It’s up to them to keep track of their taxes and pay them directly to the government.
Basic 1099-NEC Filing Instructions
To complete a 1099-NEC, you'll need to supply the following data:
Business information – Your Federal Employer ID Number (EIN), your business name and your business address.
Recipient's ID Number – The recipient's Social Security number or Federal Employer ID Number (EIN).
Report Sales – Use Box 2 (or Box 7 on the 1099-MISC) to report sales of $5000 or more of consumer products for resale, on buy-sell, deposit-commission, or any other basis.
Payment Amounts – Enter nonemployee compensation amounts paid in Box 1.
Federal Income Tax Withheld – Enter any amounts of federal income tax withheld from payment in Box 4. (You'll use this if you’re sending a 1099-NEC to an individual who refused to provide a W-9 or TIN. In this case, the federal government may require you to withhold 24% of the money you paid and send it the IRS.)
There may be instances in which you need to provide both a 1099-MISC and 1099-NEC to the same individual, however that will depend on the business conducted with them in that year. If you are unsure it's always best to consult a tax attorney in order to remain compliant.
Get more tips on how to determine who gets a 1099-NEC form here.
