Every year, businesses in the US must issue the 1099-NEC tax form to non-employees to whom they've paid US$600 or more during the tax year. This seemingly simple process can pose significant challenges, particularly as IRS penalties for non-compliance can be substantial. According to the IRS, the agency assessed US$2.9 billion in civil penalties against business income tax filers in a single year, a stark reminder of the financial risks tied to filing taxes incorrectly.
Understanding the ins and outs of the 1099-NEC form can give businesses a solid foundation for meeting their tax obligations confidently and correctly. Beyond the basic requirement, there are many details and exceptions that can affect how and when this form is used. We'll cover the nuances of the 1099-NEC form, along with in-depth insights to help businesses meet their tax responsibilities effectively.
What's in this article?
- What is the 1099-NEC tax form?
- What is non-employee compensation?
- What is the 1099-NEC tax form used for?
- Who needs to file a 1099-NEC tax form?
- Information required on Form 1099-NEC
- Threshold for Form 1099-NEC
- How to report Form 1099-NEC on your tax return
- How to correct information on Form 1099-NEC
- Penalties for non-compliance
- How Stripe can help
What is the 1099-NEC tax form?
The 1099-NEC is a form that is used by the United States Internal Revenue Service (IRS). NEC stands for "Non-employee compensation". The form was introduced in 2020, replacing box 7 on Form 1099-MISC for reporting non-employee compensation.
What is non-employee compensation?
Non-employee compensation refers to payments made to individuals who are not employees of the payer for services rendered during the course of the payer's trade or business. Typically, this refers to money paid by a business to independent contractors, freelancers or other self-employed individuals.
Here are some examples of non-employee compensation:
Fees paid to non-employee service providers, such as independent contractors, freelancers, consultants or other self-employed individuals
Payments to members of a board of directors for their services
Commissions paid to non-employee salespeople who are subject to repayment but not repaid during the calendar year
Payments to lawyers for legal services
It's important to note that non-employee compensation does not include any types of payment for which a different form is used, such as rents (reported on Form 1099-MISC) or wages to employees (reported on Form W-2).
The recipients of non-employee compensation are generally considered to be self-employed and they are subject to the self-employment tax, which covers Social Security and Medicare taxes. These individuals need to make estimated tax payments throughout the year to cover these and other taxes they may owe.
What is the 1099-NEC tax form used for?
Form 1099-NEC is mainly used for businesses to report payments of US$600 or more to non-employees, such as independent contractors, freelancers or other self-employed individuals. For instance, if a business hires a freelance writer to create content and pays them more than US$600 in a year, the business would report these payments on Form 1099-NEC.
The 1099-NEC form is used for business payments only, not personal payments. The individual or entity that receives the payment will then use this information to complete their own income tax return. If you receive a 1099-NEC, it's important to understand that no taxes have been withheld from these payments, and therefore you are responsible for any income tax and self-employment tax that may be due.
Who needs to file a 1099-NEC tax form?
Any business that pays US$600 or more to a non-employee for services during the tax year needs to file a 1099-NEC form. This often includes independent contractors, freelancers or consultants. Similarly, the individuals or entities who receive these payments will also need a 1099-NEC form as a record of their income.
Here's more detail about who needs a 1099-NEC form:
Businesses
If your business pays US$600 or more to a non-employee in a year, you'll need to complete a 1099-NEC form. The form provides a record of the payments that you've made, which is necessary for your business tax filing. You'll need to send a copy of the form to the non-employee and file a copy with the IRS. It's crucial to keep track of these payments throughout the year so that you can complete the 1099-NEC forms accurately.Non-employees
If you're a non-employee – such as an independent contractor, freelancer or consultant – and you've received US$600 or more from a business in a single tax year, you should receive a 1099-NEC form from that business. The form documents your income from that business – income that you'll need to report when you file your taxes. Because taxes aren't usually withheld from non-employee compensation, it's critical to budget for any income tax or self-employment tax that you may owe.
Typically, it's the responsibility of the business making the payment to complete the 1099-NEC form and send copies to the non-employee and the IRS. However, if you're a non-employee and you don't receive a 1099-NEC form for income of US$600 or more, it's still your responsibility to report that income on your tax return.
Information required on Form 1099-NEC
The 1099-NEC form requires several pieces of information from both the payer (usually a business) and the recipient (the non-employee or independent contractor). Here are the key pieces of information that are required:
Payer's information: This includes the payer's name, address and tax identification number (TIN), which could be a social security number (SSN) for sole proprietors or an employer identification number (EIN) for other businesses.
Recipient's information: This includes the recipient's name, address and TIN, which could be a SSN or an EIN.
Total non-employee compensation: This is the total amount of non-employee compensation (box 1) that the business paid to the recipient during the tax year. This should be the gross amount, before any tax deductions.
Federal income tax withheld: If there was any federal income tax withheld from the non-employee compensation (box 4), it should be reported in this box. However, this is uncommon, because in general, federal income tax is not withheld from non-employee compensation.
State information: If state taxes were withheld, the payer will also need to include their state tax identification number, the recipient's state and the amount of state income tax withheld.
To make this process easier, it is essential to keep accurate records throughout the year. You should also make sure that you request a completed Form W-9 from any non-employee that you pay, which will provide you with their tax identification number and other necessary information.
Threshold for Form 1099-NEC
The threshold for issuing a 1099-NEC form is US$600. This means that if a business pays US$600 or more to a non-employee for services during a tax year, it is required to issue a 1099-NEC form for that individual or entity.
If a business pays a particular non-employee less than US$600 in a tax year, it does not need to issue a 1099-NEC for that individual or entity. However, the recipient of that income is still generally required to report it on their tax return.
It should be noted that the US$600 threshold applies to each individual or entity, not to the total amount of non-employee compensation that a business pays during the year. For example, if a business pays US$500 each to three different contractors, it does not need to issue a 1099-NEC form for any of them, even though the total paid out is over US$600.
How to report Form 1099-NEC on your tax return
If you have received a 1099-NEC due to income from non-employee compensation, it's important to understand that this income will need to be reported when you're preparing your federal tax return. This process can be complicated and requires a clear understanding of the steps involved. Below is a general guide to help you navigate the process:
Schedule C
If you're a sole proprietor, an independent contractor or a self-employed individual, you will typically report the income from a 1099-NEC on Schedule C, Profit or Loss from Business. You'll enter the total amount from box 1 of the 1099-NEC on line 1 of Schedule C.Self-employment tax
Money earned from non-employee compensation is also subject to self-employment tax, which covers Social Security and Medicare taxes. You'll need to fill in Schedule SE, Self-Employment Tax, to calculate this amount. The result goes on your Form 1040.Estimated tax payments
If you're self-employed and expect to owe US$1,000 or more when you file your return, you'll typically need to make estimated tax payments throughout the year. This includes income tax and self-employment tax. You will use Form 1040-ES, Estimated Tax for Individuals, to calculate and make these payments.State taxes
Depending on your state, you may also need to report your 1099-NEC income on your state tax return.Expenses
On Schedule C, you can deduct any business expenses related to earning the non-employee compensation, which can lower your taxable income. Expenses can include supplies, travel, home-office expenses or other costs necessary for your work.
Bear in mind that navigating tax matters can be complicated, and the precise forms and processes that you need may change based on your specific situation. It's always a good idea to seek advice from a tax professional to ensure that you're getting the most accurate information and guidance.
How to correct information on Form 1099-NEC
Correcting information on a Form 1099-NEC that you've already filed with the IRS involves submitting a corrected form. Here's how to do that:
Obtain a new Form 1099-NEC: You can get this form from the IRS website or by ordering it from the IRS. Remember that the form must be scannable. This means that you can't just print a copy from the web – you'll need to use an official IRS form.
Complete the form with the correct information: Fill in the form with the correct information. Ensure that you include your correct TIN and the TIN of the recipient, and the correct amount of non-employee compensation.
Tick the "CORRECTED" box: On the new 1099-NEC form, you'll see a box at the top labelled "CORRECTED". Make sure that you tick this box to indicate to the IRS that this form is a corrected version.
Send the corrected form to the recipient and the IRS: You'll need to send the corrected 1099-NEC to the recipient of the non-employee compensation. You'll also need to send the corrected form to the IRS. If you originally filed the 1099-NEC with the IRS electronically, you should also file the correction electronically.
Correct the 1096 form: Form 1096 is the summary form that you send to the IRS along with your 1099 forms. If the error on the 1099-NEC affected the totals that you reported on Form 1096, you'll also need to correct and resend Form 1096.
The above steps are a general guide and the exact process may vary based on your circumstances. Errors on tax forms can have serious implications, so if you're unsure about how to correct an error, consult a tax professional. It's important to make corrections as soon as you notice an error to avoid potential penalties from the IRS.
Penalties for non-compliance
Failure to file correct 1099-NEC forms in a timely manner can result in penalties from the IRS. The penalties vary based on the severity of the infraction and range in amount. Non-compliance falls into two broad categories: failure to file and intentional disregard.
Failure to file
If you fail to file a correct 1099-NEC by the due date and you cannot provide reasonable cause, you may be subject to a penalty. The amount of the penalty is based on when you file the correct form. Here's a summary of the penalties:
- The penalty is US$50 per form if you file correctly within 30 days of the due date; the maximum penalty is US$194,500 per year (US$556,500 for larger businesses).
- The penalty is US$110 per form if you file correctly more than 30 days after the due date but by 1 August; the maximum penalty is US$556,500 per year (US$1,669,500 for larger businesses).
- The penalty is US$280 per form if you file after 1 August or do not file the required forms; the maximum penalty is US$1,130,500 per year (US$3,392,000 for larger businesses).
Intentional disregard
If the IRS determines that a business intentionally disregarded the requirement to provide a correct 1099-NEC in a timely manner, the penalty per form is at least US$560 with no maximum limit.
These penalties apply for each instance in which a business fails to file a 1099-NEC correctly. As a result, a business that fails to provide multiple 1099-NEC forms could face substantial penalties. Furthermore, in addition to federal penalties, some states may also impose penalties for failure to file correct 1099-NEC forms.
How Stripe can help
Stripe Tax takes the burden off businesses by automatically calculating and collecting sales tax, and generating tax reports. With Stripe Tax, businesses of all sizes can meet their tax responsibilities confidently and circumvent potential penalties.
Here's an overview of how Stripe Tax helps businesses:
Automating tax calculations
Stripe Tax can calculate tax rates for businesses automatically and in real-time, depending on the products, location of the business and customer's location. While this feature is primarily designed to help with sales tax and value-added tax (VAT), it can also help businesses track the amount that they're paying to non-employees, which they'll need to know for 1099-NEC compliance.Data collection and verification
Collecting correct information from contractors, including TINs, can be a complex task. Stripe Tax has features to automate this process, collecting and verifying TINs, addresses and other necessary data during the payment process.Form generation and delivery
A key aspect of 1099-NEC compliance is creating and sending the forms. Stripe Tax can generate these forms for you, based on the payment data that they've collected, and then send them directly to contractors, as well as file them with the IRS.Record-keeping
Keeping accurate records is important in case of an audit and for your own business-management purposes. Stripe Tax can help maintain these records, tracking all the necessary information about payments to non-employees and the tax forms that you've issued.
Familiarising yourself with the reporting requirements of Form 1099-NEC and leveraging tools such as Stripe Tax can significantly simplify how you navigate taxes and compliance. By staying informed and up to date with tax regulations, businesses can remain focused on day-to-day operations and planning for the future.