1099 NEC Form

2020 was the first year in almost two decades that 1099-NEC form submission have been necessary, as this form hasn’t been in use since 1983. It therefore makes sense that today’s businesses might need a bit of a recap. 

This article will cover what form 1099-NEC is for, which working arrangements will prompt you to submit 1099-NEC, the information you’ll need to collect, and the deadlines you want to mark in your calendar. Let’s dive in!

This article is part of our guide on independent contractor taxes.

1099-NEC form background and overall purpose

Back in 1983 – the IRS changed the process for organizations to declare the payments that they made to self-employed workers. While it had traditionally been submitted using the Form 1099-NEC, the IRS decided to add a new box on Form 1099-MISC to include this information, making 1099-NEC obsolete. The idea was to make it easier for businesses, providing a single form where they could include all worker compensation from employees to independent contractors.

However, businesses have found competing deadlines to be confusing. As Form 1099-MISC contained both types of worker information, it effectively had two separate filing deadlines for employees and non-payroll workers. It was due to be submitted to self-employed workers by January 31st, while the deadline for employees is February 28th.

To clarify things for businesses, the IRS decided that as of the tax year 2020, Form 1099-NEC would be re-introduced as a requirement for businesses to submit payment information for self-employed workers.

Who is form 1099-NEC for?

NEC stands for Non-Employee Compensation. You’ll need to submit a Form 1099-NEC for any US independent contractor who works for your business as a self-employed individual. For non-US contractors you’ll need to fill out Form 1042-S. The threshold for whether you need to submit a form is whether you have paid the contractor in question $600 during the tax year.

Let’s use a simple example. You need some security services, and so you pay Tony the IT guy $559 for a one-off project to stress-test your new firewall. As the cost is under $600, you won’t need to submit Form 1099-NEC at all. However, if he charges you an extra $50 for writing up a shiny report on his findings – you’ll need to submit Form 1099-NEC by January 31st.

Remember that you only need to consider business transactions, so if you ask Tony to come to your house to check your home computer, no matter how much it costs you, you don’t need to worry about Form 1099-NEC or any other. Save your worrying for the virus your teenager downloaded while playing Roblox.

Note: You only need to use Form 1099-NEC if you’re reporting non-employee compensation. For all employee compensation – continue to use Form 1099-MISC.  

One of the biggest challenges companies face with workers who are classified as non-employees is understanding which worker is an employee and which is not. Your organization doesn’t decide whether someone is classified as self-employed or employed by you – your state law defines the legal test your non-employee needs to meet in order to be defined as one or the other. This could be the strict ABC test, the broader Borello test or the IRS 20 factor classification test.

The classification will usually be defined by factors to do with the control you have over the worker, including where they work, the type of work they complete, and how much they get paid. If you have control over deciding these three elements of their work – the chances are that you have hired an employee, not a contractor. If you’re not sure whether you need to fill out Form 1099-NEC for a specific worker relationship, you can fill out Form SS-8 and the IRS will make the decision on your behalf.

Please note that these forms apply only to US-based companies. UK-based companies should follow the IR35 guidelines.

How to follow form 1099-NEC instructions

Ready to fill out Form NEC-1099? Here’s how it’s done. First, remember that you’ll need an official copy of the form, and you can’t just download or print one directly from the web. You can get Form 1099-NEC directly from the IRS, or you can ask your accountant to provide it for you. You can also get the forms from office supply stores, and e-filing options are available through business or accounting software.

Once you have the form, make sure that you have a Tax ID number for each of your self-employed workers. This can be found on their W-9 form, which you should have sent them when you onboarded them into the company. If your worker refuses to give you their Tax ID number – this should be a warning sign about working with them, but as a last resort you can fill in this space with zeros for the IRS to follow up on.

Next, add your business details, including your name, address, and federal employer ID number. In each box, you’ll be able to see what you need to include. For example, in Box 1, you will include the dollar amount that you paid the contractor during the tax year.

Many of the boxes will be to do with withholding taxes, which is usually not a concern for self-employed individuals who handle their own taxes through self-assessment each year. However, in some cases, the IRS may reach out and let you know that this particular worker is subject to backup withholding, which is generally 24%. You should be able to check Part II of your worker’s Form W-9 and see where they have certified that they are not subject to backup withholding. (See how important that W-9 is becoming?)

Don’t forget to use Box 6 to identify the states to which you’ll be reporting the income, and then send copy A to the IRS, and copy B to the self-employed worker.

Form NEC-1099 instructions for understanding deadlines and penalties

In line with the deadline for submitting Form W-2, the deadline for Form NEC-1099 is January 31st (or February 1st /2nd if the 31st falls over the weekend, as it did in 2020). Mark your calendars, as if you miss the deadline, you’ll be subject to a minimum of $100 in fines for each form you didn’t submit on time, and the penalties have no stated maximum if the IRS considers you to have willfully ignored your responsibility. That’s a lot less free cash to spend on Tony the IT guy next year.