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What is the 1099 NEC form used for?

Jul 21, 2022 4 min
What is a 1099 nec form used for

What is the 1099 NEC form used for?

Reading Time: 4 minutes

As a small business owner, you are already familiar with working with the Internal Revenue Service (IRS) forms. The 1099 NEC form was reintroduced in 2020 by the IRS to eliminate the misunderstanding of deadlines in filing Form 1099-MISC for different types of payments.

In the article, we will learn:

  • What is the 1099 NEC form?
  • What’s included on Form 1099-NEC?
  • How to file the 1099 NEC form?
  • What are the different copies?
  • When is the form due?
  • how to correct an error in filing the form
  • Is there a penalty for not filing 1099-NEC?

What is a 1099 NEC form?

Reintroduced by the IRS in 2020, the form is for filing non-employee compensations. Non-employee compensations are payments made to individuals classified as independent contractors/freelancers rather than as an employee.

So, if you pay at least $10 in royalties or $600 to a freelancer for projects or services, they will need to receive a 1099-NEC.

Payments reported on the form may include the following:

  • Fees
  • Commissions,
  • Prizes and Awards
  • Any other form of compensation for services performed for your business by an independent contractor.
  • Rents.
  • Fishing boat proceeds.
  • Medical and health care payments.
  • Payments to an attorney.
  • Non-qualified deferred compensation.

Why the 1099 NEC form?

The IRS returned the form in 2020 to solve small businesses’ confusion regarding the deadline to file 1099-MISC with non-employee compensation. 

Before 2015, the deadline to file 1099-MISC with non-employee compensation and other miscellaneous payments was February 28. In 2015, the introduction of the Protecting Americans from Tax Hikes Act (PATH Act) changed the deadline to January 31 for non-employee compensation specifically.

The two different deadlines for the same form confused many small business owners.

To clear up this confusion, the IRS decided to relaunch Form 1099-NEC.

Check out 10 simple ways to avoid paying taxes legally.

What information is on Form 1099-NEC

When filing, you need to provide the following information, but not limited to:

  • Payer’s details – name, address, number, and Tax Identification Number (TIN).
  • Recipient’s details – name, address, and TIN.
  • Amount of non-employee compensation paid.
  • Federal or state income tax withheld.

See below a sample of the form from the IRS website.

If you have challenges getting the personal information of a freelancer or contractor, you can have them fill out a W-9 form.

How to File Form 1099-NEC

The form must be filed with the IRS before January 31 using either paper or electronic filing.

You can file payments that exceed $600 by downloading the form from the IRS website, filling out the required information, and sending it to the IRS address, depending on your state.

You have the option to file electronically using the IRS Filing Information Returns (FIRE) system. If you are filing 250 or more forms, you can’t send paper forms; you must file electronically.

Akaunting also lets you file the form using the 1099 Form app.

What are the different copies of the form?

Copies of the form are distributed to different participants in your business operations.

These copies are:

  • Copy A – This is sent to the IRS.
  • Copy 1 – sent to your state tax department (if required).
  • Copy B – sent to the recipient.
  • Copy 2 – also sent to the recipient and filed with their state income tax return.
  • Copy C – kept for your business records.

When is Form 1099-NEC due?

The IRS set the due date of form 1099-NEC as January 31, irrespective of your business-adopted method of filing (either electronically or by paper). You’ll need to send copies of the form to recipients and the IRS.

If the due date falls on any Federal holidays or weekends, the next business day will be the due date.

How to correct an error in filing the 1099 NEC form

If you make a mistake while filing Form 1099-NEC, you’ll need to get another copy and mark the box next to “CORRECTED” at the top. 

Send the corrected form to the IRS, contractor or vendor, and state agencies (if applicable). And also, file Form 1096 to accompany the return. Do not include a copy of the original return you filed incorrectly.

Note that the IRS splits errors into Type 1 (incorrect money amount, code, checkbox, or filed a return when you should not have filed it) and Type 2 (taxpayer identification number or receiver’s name is incorrect).

Is there a penalty for not filing 1099-NEC?

Try as much as possible to adhere to the due date for filing, as the IRS imposes penalties for delayed filing. There is also a penalty for incorrect information.

The IRS maintains the same penalty and interest rate for all information returns, including 1099-NEC. The penalty rate ranges from $50 per return to $550.

Final thoughts

Try not to get your business into problems with the IRS, as penalties could hurt your growth and profitability. Form 1099-NEC is essential for your business, mainly when you deal with freelancers who offer services with charges above $600—set reminders for these obligations.

Akaunting helps you keep accurate track of your tax days and necessary bills. You don’t need an accounting degree to manage your everyday bookkeeping needs.