Every year, businesses must issue the 1099-NEC tax form to nonemployees to whom they’ve paid $600 or more during the tax year. This seemingly simple process can pose significant challenges, particularly as IRS penalties for noncompliance can be substantial. According to the IRS, the agency assessed $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 impact 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 effectively meet their tax responsibilities.

What’s in this article?

• What is the 1099-NEC tax form?
  
• What is nonemployee 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 noncompliance
  
• How Stripe can help
  

What is the 1099-NEC tax form?

The 1099-NEC is a form used by the United States Internal Revenue Service (IRS). NEC stands for “Nonemployee Compensation.” The form was introduced in 2020, replacing box 7 on Form 1099-MISC for reporting nonemployee compensation.

What is nonemployee compensation?

Nonemployee compensation refers to payments made to individuals who are not employees of the payer for services rendered in the course of the payer’s trade or business. Typically, this means money that a business paid to independent contractors, freelancers, or other self-employed individuals.

Here are some examples of nonemployee compensation:

• Fees paid to nonemployee 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 nonemployee salespeople that are subject to repayment but not repaid during the calendar year

• Payments to attorneys for legal services

It’s important to note that nonemployee 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 nonemployee compensation are generally considered 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 $600 or more to nonemployees, 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 $600 in a year, the business would report these payments on Form 1099-NEC.

The 1099-NEC is not used for personal payments, only business 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 a 1099-NEC tax form

Any business that pays $600 or more to a nonemployee 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 $600 or more to a nonemployee in a year, you’ll need to complete a 1099-NEC form. The form provides a record of the payments you’ve made, which is necessary for your business tax filing. You’ll need to send a copy of the form to the nonemployee 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.

• Nonemployees
  If you’re a nonemployee—such as an independent contractor, freelancer, or consultant—and you’ve received $600 or more from a business in a year, you should receive a 1099-NEC form from that business. The form documents your income from that business, income you’ll need to report when you file your taxes. Because taxes aren’t usually withheld from nonemployee compensation, it’s critical to budget for any income tax or self-employment tax 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 nonemployee and the IRS. However, if you’re a nonemployee and you don’t receive a 1099-NEC form for income of $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 nonemployee or independent contractor). Here are the key pieces of information that are required:

• Payer’s information: This includes the payer’s name, address, and taxpayer identification number (TIN), which could be a social security number (SSN) for sole proprietors or 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 nonemployee compensation: This is the total amount of nonemployee 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 nonemployee compensation (box 4), it should be reported in this box. But this is uncommon, because generally, federal income tax is not withheld from nonemployee 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, accurate record-keeping throughout the year is essential. You should also make sure to request a completed Form W-9 from any nonemployee you pay, which will provide you with their taxpayer identification number and other necessary information.

Threshold for Form 1099-NEC

The threshold for issuing a 1099-NEC form is $600. This means that if a business pays $600 or more to a nonemployee 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 nonemployee less than $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.

Notably, the $600 threshold applies per individual or entity, not to the total amount of nonemployee compensation a business pays during the year. For example, if a business pays $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 $600.

How to report Form 1099-NEC on your tax return

If you have received a form 1099-NEC due to income from nonemployee compensation, it’s important to understand that this income will need to be reported when you’re preparing your federal tax return. The 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 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 nonemployee compensation is also subject to self-employment tax, which covers Social Security and Medicare taxes. You'll need to fill out 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 $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 nonemployee compensation, which can lower your taxable income. Expenses can include supplies, travel, home office expenses, or other costs necessary for your work.

Keep in mind, navigating tax matters can be complicated and the precise forms and processes you need may change based on your specific situation. It’s always a good idea to seek advice from a tax professional to ensure 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, so you can’t just print a copy from the web; you’ll need to use an official IRS form.

• Complete the form with correct information: Fill out the form with the correct information. Ensure that you include your correct TIN and the TIN of the recipient, and the correct amount of nonemployee compensation.

• Check the “CORRECTED” box: On the new 1099-NEC form, you’ll see a box at the top labeled “CORRECTED.” Make sure to check this box to indicate to the IRS that this form is a corrected version.

• Send the corrected form to the recipient and IRS: You’ll need to send the corrected 1099-NEC to the recipient of the nonemployee 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 you send to the IRS along with 1099 forms. If the error on the 1099-NEC affected the totals 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 with 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 noncompliance

Failure to file correct and timely 1099-NEC forms can result in penalties from the IRS. The penalties vary based on the severity of the infraction and range in amount. Noncompliance 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 rundown of penalties:

• The penalty is $50 per form if you correctly file within 30 days of the due date; the maximum penalty is $194,500 per year ($556,500 for larger businesses).
  
• The penalty is $110 per form if you correctly file more than 30 days after the due date but by August 1; the maximum penalty is $556,500 per year ($1,669,500 for larger businesses).
  
• The penalty is $280 per form if you file after August 1 or do not file required forms; the maximum penalty is $1,130,500 per year ($3,392,000 for larger businesses).
  

Intentional disregard

If the IRS determines that a business intentionally disregarded the requirement to provide a correct and timely 1099-NEC, the penalty per form is at least $560 with no maximum limit.

These penalties apply for each instance in which a business fails to file a 1099-NEC correctly, so 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 automatically calculate tax rates for businesses 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 they’re paying to nonemployees, 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 they’ve collected, and then send them directly to contractors,as well as file them with the IRS.

• Recordkeeping
  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 nonemployees and the tax forms you’ve issued.

Familiarizing yourself with the reporting requirements of Form 1099-NEC and leveraging tools like 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.