Form 1099-NEC is a tax document businesses use to report payments made to non-employees, such as contractors, freelancers, consultants, vendors, and other self-employed individuals.
The U.S. Internal Revenue Service (IRS) refers to Form 1099-NEC as non-employee compensation. Companies use Form 1099-NEC to report any compensation exceeding $600 paid to individuals who did work for them but aren’t employees.
Form 1099-NEC vs. Form 1099-MISC
Reporting non-employee compensation involves using both forms 1099-NEC and 1099-MISC. However, while Form 1099-NEC is for compensation subject to self-employment tax, Form 1099-MISC is for compensation not subject to self-employment tax.
Form 1099-MISC records a taxpayer’s miscellaneous payments over $600, such as rent, attorney fees, prizes, and medical and healthcare payments.
Before 2020, employers reported all non-employee compensation in box 7 on Form 1099-MISC. However, due to confusion regarding dual-filing deadlines on Form 1099-MISC, the IRS created Form 1099-NEC, which replaces Form 1099-MISC for reporting non-employee compensation.
Learn more: Form 1099-NEC vs. Form 1099-MISC
Form 1099-NEC vs. Form W-2
Taxpayers use Forms 1099-NEC and W-2 as documents to complete their tax returns, with the main difference being the employment relationship and the purpose of the payments.
A Form 1099-NEC is for any non-employee, such as an independent contractor, freelancer, or self-employed individual. They are responsible for paying their own taxes and receive a 1099-NEC to report their income when filing taxes.
Learn more: 1099 Employees: What to Know to Stay Compliant
A Form W-2 is for an employee of a company or organization. The employer withholds income taxes, Social Security, and Medicare from the employee’s paycheck, and the employee receives a W-2 form to report their income and taxes withheld.
How to fill in Form 1099-NEC
All businesses that paid non-employees more than $600 must generate and distribute a Form 1099-NEC.
First, the employer must obtain the non-employee’s information by requesting a Form W-9, which includes their legal name, business entity, address, and Taxpayer Identification Number (TIN). Then, the employer can complete the 1099-NEC with the following information:
- Business’s name, address, phone number, and Federal Employer Identification Number (FEIN)
- Non-employee’s name, address, and Tax Identification Number (TIN) as reported on their Form W-9
- State identification number
- Non-employee compensation exceeding $600 paid during the previous year
Businesses must provide one copy to the non-employee and one copy to the IRS.
How to file Form 1099-NEC
Filing a Form 1099-NEC can be done online or by mail. For electronic filing, utilize third-party software or services compatible with the IRS FIRE (Filing Information Returns Electronically) system. The IRS will not accept scanned or handwritten forms. For paper filing, request scannable templates from the IRS.
Businesses must submit two copies of Form 1099-NEC. Copy A goes to the IRS, while Copy B goes to the non-employee.
Businesses must file 1099-NEC forms by January 31 each year for non-employee payments made the prior year. Ensure all information is accurate and complete, keep a copy for records, and file on time to avoid penalties.
Form 1099-NEC FAQ
Below are answers to common questions about Form 1099-NEC.
Who uses Form 1099-NEC?
Businesses use Form 1099-NEC to report non-employee compensation over $600. A company must fill out and file a 1099-NEC when hiring individuals who are not formal employees for services.
Self-employed individuals use Form 1099-NEC to report their income and file their taxes.
Who should not receive Form 1099-NEC?
Employees should not receive a Form 1099-NEC from their employers. If an employer provides an employee with a Form 1099-NEC, they risk misclassification. An employer must report an employee’s income using a W-2.
Does 1099-NEC mean self-employed?
Yes, 1099-NEC reports income payments to non-employees, which includes self-employed individuals, contractors, and freelancers. If a business provides an individual with a Form 1099-NEC, they treat the recipient as a self-employed worker.
Does 1099-NEC get reported to the IRS?
Yes, a business must report a Form 1099-NEC to the IRS for any non-employee paid $600 or more for services. The business provides one copy to the non-employee for their tax filing and one copy to the IRS.
How much tax do you pay on a 1099-NEC?
Any 1099 income above $400 receives a 15.3% fixed rate tax by the IRS, which includes 12.4% for Social Security and 2.9% for Medicare.
How do I report 1099-NEC on my tax return?
When self-employed individuals receive a 1099-NEC from a business that paid them for their services, they may begin filing their tax return. 1099-NEC income is considered self-employment income, and the form helps self-employed individuals claim income, make deductions, and calculate net profits.
Sole proprietors report 1099-NEC income on their tax return on Schedule C for business profit and loss, and partnerships report income on Schedule K-1. They can also deduct eligible business expenses when filing their tax return.
After reporting income, self-employed individuals must pay taxes on their income and Social Security and Medicare taxes. Individuals should keep records of their 1099-NEC forms for at least three years for future tax purposes and to verify income.
Disclaimer: This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. You should contact your attorney or tax advisor to obtain legal and/or tax advice with respect to your particular situation. Only your individual attorney or tax advisor can provide assurances that this information—and your interpretation of it—is applicable or appropriate to your specific situation. All liability with respect to actions taken or not taken based on this information is hereby expressly disclaimed. All content is provided "as is," and Velocity Global makes no representations or warranties concerning this information.
