This tax year millions of independent workers will receive tax Form 1099-NEC in the mail.
This form is used by businesses to report payments made to nonemployees, like independent contractors or freelancers. You don’t fill out this form – the business that hires you does! Consider what to remember as we cover all the form details and 1099-NEC instructions for filing.
What is a 1099-NEC?
The 1099-NEC is the Internal Revenue Service (IRS) form to report nonemployee compensation—that is, pay from 1099 independent contractor jobs (also sometimes referred to as self-employment income). Examples of this include freelance work or driving for companies like Uber, Lyft, or DoorDash. If you’re not on a company’s payroll but work for them independently and you’ve made at least $600 during the year, there’s a good chance you could receive this form.
1099-NEC vs. 1099-MISC
If you’re an independent contractor who has received Form 1099-MISC in the past, you’ll now receive Form 1099-NEC instead. Previously, companies reported this income information on Form 1099-MISC. The Internal Revenue Service introduced the new independent contractor tax form in the 2020 tax year as part of the Form 1099 series as an information return. Aside from the form’s name, not much else has changed for form recipients. Find details about other types of 1099 forms.
Do you need more help with a Form 1099-NEC you received from independent contractor work? Check out our Guide to Gig Worker Taxes.
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What is nonemployee compensation?
If you’re totally new to nonemployee compensation—and given the continued rise in gig workers, there’s a good chance you are—read on. There are important tax considerations to know about now, so don’t wait until tax time. Gig worker taxes are something you want to wrap your head around well before it comes time to file your tax return.
Nonemployee compensation is paid to 1099 independent contractors, not W-2 employees. If that distinction doesn’t ring a bell, be sure to review the difference between employee and independent contractor work statuses.
From a tax standpoint, here’s the main difference:
- Employees: Employers will take out variouspayroll taxes(such as federal and state taxes) from employees’ paychecks. At tax time, employees will receive a Form W-2 from their employer. (Note: AW-2 formshould be issued to an employee by the deadline, which is on January 31st).
- Independent contractors: As an independent contractor, your check won’t have any payroll taxes withheld. That means paying as you go falls on your to-do list. At tax time, you’ll receive Form(s) 1099-NEC to show the total amounts you were paid for the year.
So, how should independent contractors pay taxes on the nonemployee compensation shown on this 1099? To avoid an underpayment penalty, you should continue to pay taxes as you go and not wait until tax time.
Instead of doing it on a by-paycheck basis, you’ll do it with quarterly estimated payments. That means four times a year, you’ll send a tax payment to the IRS and any applicable state and local revenue departments.
Need some help with that? Check out the basics of paying estimated taxes on IRS Form 1040-ES. For more on financial considerations of receiving nonemployee compensation, review these common problems for gig workers.
Nonemployee compensation and Form 1099-NEC
So, let’s get back to IRS Form 1099-NEC and outline what it reports and what you do with it. Essentially, businesses use this form for payments for services as part of their trade or business. In addition to individuals, a business may file Form 1099-NEC to a partnership, estate, or corporation.
The 1099-NEC only needs to be filed if the business has paid you $600 or more for the year. If you made less than $600, you’ll still need to report your income on your taxes, unless you made under the minimum income to file taxes.
When you get your Form 1099-NEC for your nonemployee compensation, you’ll see that you’ve received Copy B. The business that paid you will send Copy A to the IRS.
On the form itself, you’ll see your personal information and the amounts paid to you. There are also boxes for federal income tax and state tax information, but they will most likely be empty unless you’re subject to back-up withholding.
You’ll use the amount in Box 1 on your Form 1099-NEC to report your self-employment income. Instead of putting this information directly on Form 1040, you’ll report it on Schedule C.
What else should you know about filing taxes with nonemployee compensation?
Another step in the process is to calculate and pay self-employment taxes. As a 1099 independent contractor, your coverage of Social Security and Medicare taxes is paid through these taxes. To determine your self-employment taxes, you’ll use Schedule SE. For the details, find out how self-employment tax works.
Here’s some good news: As an independent contractor, you may be eligible to take the qualified business income deduction. This deduction lets you take a 20% deduction on pass through income (i.e., income from a sole proprietorship, partnership or S corp that is reported on your personal tax return). You can also value from taking other business deductions.
Getting help with Form 1099-NEC
Who knew that being an independent contractor would mean so many changes to your taxes? It’s definitely new territory if you’ve only ever received a Form W-2.
With H&R Block, you can confidently file your 1099-NEC knowing you’ll get your max refund–or you’ll get your money back.
Check out these filing options for independent contractor tax forms:
- for independent contractors with no expenses to deduct.
- for independent contractors with expenses to deduct.
