Anyone who’s tried grits knows they’re bland. Anyone who’s looked at grits knows they’re bland. It takes a full stick of butter and more than your daily recommended intake of salt to give them any flavor at all.
1099s are like grits. Bland, drab, but nonetheless an American staple.
Most freelancers and independent contractors will get a 1099-NEC this year. That’s why it’s important to understand what they are, how they work, and how they compare to a 1099-MISC. While I can’t guarantee this will be the most interesting thing you read today, I'm going to do my best to add as much salt as I can.
What is Form 1099-NEC?
Form 1099-NEC stands for “nonemployee compensation.” Freshly minted in 2020, this form is used to report payments made to self-employed individuals throughout the tax year. Think of it as the independent contractor’s answer to form W-2, which reports income earned by employees.
Historically, nonemployee compensation was reported on the 1099-MISC form. But with the uptick in freelance and gig work, the IRS thought it was a good idea to create the brand new form 1099-NEC specifically to track these payments. (Because the world needed one more form!)
Who gets a 1099-NEC?
You can expect to receive a 1099-NEC if you:
- Worked as a freelancer or contractor
- Were paid more than $600 from a single company or individual.
Who gets a 1099-K instead?
If you were a freelancer or contractor who got paid through a service like PayPal, you might get a 1099-K instead.
Introduced in 2008, form 1099-K is issued by credit card companies and third party payment processors such as PayPal and Stripe. Historically, it reported payments to anyone who:
- Earned at least $20,000
- Got paid in at least 200 transactions throughout the year
Beginning in 2022, though, 1099-Ks will be issued to anyone earning more than $600, regardless of how many transactions they received throughout the year.
This change will widely expand who receives 1099-Ks in 2022. Before, it was typically online retail stores or subscription-based services that received them. But after the change, it could be anyone who accepts third party payments, from hairstylists to dog walkers (This change won’t affect your tax filing till 2023 though!)
Bottom line: Anyone who receives a 1099-K doesn’t also need a 1099-NEC from the same client or platform.
If your brain feels like mush right now, I don’t blame you! Whatever 1099 form you receive this year, Keeper can help! If you file through our app, just upload the form as a PDF, and we’ll handle the rest!
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What is Form 1099-MISC?
Form 1099-MISC was partially replaced by 1099-NEC, but it’s still in use. It’s now used as a catch-all for other types of income.
Who gets a 1099-MISC?
Instead of independent contractor payments, this form now reports payments like the following:
- More than $10 in royalties
- Rent payments over $600
- Prizes and awards over $600
- Payments of over $600 for medical and healthcare services
- Legal settlements
- Fishing boats proceeds
- Direct sales of $5,000 or more to a buyer who’s reselling it (Think Mary Kay consultants)
- Payments to an attorney for non-legal services
- Truly miscellaneous payments, like for promotional payouts from a sports betting platform
There may be situations where one person gets multiple 1099 forms from the same issuer, for different categories of income.
For instance, let’s say you own a warehouse for your business, and one of your customers asks to rent some of the unused space from you. In that case, they would send both a 1099-MISC for the rent they pay you and a 1099-NEC for their payments to you as a customer.
When you need to file a 1099-NEC
If you’re an independent contractor, you might end up paying other contractors to help you do your work. Think, for example, of a personal assistant to stay organized, or a marketing specialist to help you find more clients.
Paid someone at least $600 for services like these? Then you’ll need to issue a 1099-NEC for them.
Here's something to note about payments to lawyers in particular. If you're paying one for actual legal services, those are reported on Form 1099-NEC. It's the same as if you'd hired any other type of contractor.
However, if you're paying an attorney for something other than their services — say, as part of a settlement agreement — you'd file a 1099-MISC for them instead. More on that later!
When you don’t need to file a 1099-NEC
Anyone who receives a 1099-K does not need to be issued a 1099-NEC. So if you have contractors that you pay regularly through a third party that meet the two requirements above, you don’t need to sweat over issuing them a 1099-NEC.
Additionally, if you've paid a C Corporation and or an S Corporation, they don't need to be issued a 1099-NEC.
Sometimes this is obvious. For example, they might have “Inc” after their company name, which indicates they’re a corporation.
For other vendors, you might have to do more research. A company with a name that ends in “LLC,” for example, might actually be registered as an S Corp for tax purposes!
If you’re feeling overwhelmed at this point — deep breaths. If you accidentally send a 1099 to a business entity that doesn’t qualify, you won’t get in trouble.
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How to file a 1099-NEC
There’s a penalty if you neglect to issue a 1099 to someone who needs one. This ranges from $50-$270 per form, depending on how late it is.
Here’s how to make sure you don’t get penalized for a missing 1099-NEC.
Step #1. Ask your contractor to fill out a W-9
Have your contractors fill out a Form W-9 before you issue them any payments. The W-9 will give you lists out all the relevant information you’ll need in order to file a 1099-NEC:
- Tax ID number
- Entity classification: Sole proprietor, partnership, or corporation
- Current mailing address
This will help you figure out if you even need to send them a 1099 form.
What to do if you don’t get a W-9 back
It’s very common that contractors are uncooperative and don’t provide the information you need to file on time. Don't freak out. Here's what you do if that happens:
Save any records you have demonstrating that you made a concerted effort to gather their information prior to the deadline – emails, call logs, text messages, and more. Rule of thumb: make three attempts to gather the taxpayer's information before giving up.
Next, file the 1099 on paper rather than e-filing it. You can't e-file 1099's with missing information, but you can paper file them. In the boxes where you're missing information, write "refused." Send a copy to the IRS and to the payee.
Lastly, you'll want to subtract backup withholding from their pay going forward. Backup withholding is a flat 24% rate designed to curtail workers who try to avoid taxes. As the payer, you're required to pay this directly to the IRS from the contractors earnings. You'll report those payments using Form 945 once a year.
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Step #2. Know how many copies you’ll need
Once you’ve gathered all the recipient data, you can begin preparing your forms.For every eligible recipient, you’ll complete three copies of the same form:
Copy A for the IRS
If you’re paper-filing your 1099-NEC, this will be the form with the red ink, as pictured below. Most office supply stores sell these. Do not try to print at home!. The IRS will reject it and there will be a penalty.
The red forms are made on special, scannable paper, much like scantrons for the SAT. (This might be the only meaningful way in which standardized testing has prepared us for the real world.)
Copy B for the recipient
This copy is given to the contractor directly. It can be mailed, hand-delivered, emailed, or sent by carrier pigeon. Just make sure they get it.
Copy C is for your state
State requirements vary, and many states participate in the IRS Combined Filer Program.
The CF Program is a shared database, so if you e-file your 1099-NEC with the IRS, the state will get it automatically. (States that don’t have an income tax typically don’t require 1099-NEC’s to be filed.)
Step #3. Carefully fill out the form
While the IRS would like us to believe that their shiny new form is intuitive, for many of us it’s not. So let’s look at the boxes that cause the most confusion.
Names and TINS
The names should default to the business names. But if you or the recipient is operating under your personal name, you can use that too.
The important thing is that the name and the tax identification numbers (TINs) match. Personal names go with Social Security Numbers, while business names go with Employer Identification Numbers.
Account number
This is only required in some cases, like if you’re issuing multiple 1099s to the same person.
The account number can be up to 20 characters long, and can be a combination of your choosing. (Just don’t make it the recipient’s TIN number).
The IRS recommends adding an account number to every 1099 you issue, but it’s not required.
Box 4 and 5: Federal and state withholding
If you didn’t withhold for your contractors, don’t panic! Most people don’t. Withholding is usually optional for contractors.
Occasionally, a freelancer might request you to withhold on their behalf, in which case it would be reported here.
Box 6: Your state ID number
This should have been issued when you registered with your state, but every state is different. If your state doesn’t require a 1099-NEC, you can leave it blank.
Step #4. Prepare form 1096
Surprise! There’s one more form. I’ll pause for your collective groan.
Form 1096 is the cover sheet that you’ll provide with your 1099-NECs.
On it, you’ll list how many 1099s you’re filing, the total amount for all box 1 payments, and your basic company information.
Step #5. File the 1099s
There are two options for filing your 1099’s: e-file and paper. Unfortunately the IRS hasn’t made a free e-file option for taxpayers with fewer than 250 1099s (meaning… most of us). But there are a lot of easy and affordable e-filing programs out there.
If you opt to paper file, the address to mail your 1099 packet depends on what state you live in. See the IRS chart below for reference.
Last, but perhaps most importantly, make sure to submit your filings on or before the deadline. In 2022, it’s January 31st for all your copies: recipient, federal, and state. That’s true if you e-file as well!
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How to file a 1099-MISC
Most people won’t have to bother with this form anymore. But if you happen to host a customer raffle or (God forbid) paying out a legal settlement, you might need to file one. The steps are nearly identical to the 1099-NEC.
- Prepare all three copies of the 1099-MISC (Federal, State, and Recipient)
- Fill-out your form 1096 summarizing the payments you’re reporting
- Send out all three copies by the deadline
The 1099-NEC deadline is January 31st for all three copies, whether you’re filing electronically or on paper. But things are a little for 1099-MISC. Here are the deadlines:
As you can see, the 1099-MISC form gives you slightly more time before the official copies are due. This is because the categories of income reported on the 1099-MISC often require additional time to verify.
And that's it! Go forth and file your information returns.
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At Keeper, we’re on a mission to help people overcome the complexity of taxes. We’ve provided this information for educational purposes, and it does not constitute tax, legal, or accounting advice. If you would like a tax expert to clarify it for you, feel free to sign up for Keeper. You may also email support@keepertax.com with your questions.
