What is Form 1099-NEC? Form 1099-NEC is used to report nonemployee compensation amounts to the IRS. A nonemployee is defined as a person or business who is not employed by your company, such as independent contractors, freelancers, or outsourcing companies.
Alternatively, if you need to report income amounts made by employees, then you should use Form W-2 instead.
Who Receives Form 1099-NEC?
The IRS instructs that a Form 1099-NEC, Nonemployee Compensation, must be completed each person:
- To whom you have paid at least $600 during the course of business during the year for:
- Services performed by someone who is not your employee (including parts and materials);
- Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish; or
- Payments to an attorney
- From whom you have withheld any federal income tax under backup withholding rules, regardless of the amount of payment.
Either Form 1099-NEC or 1099-MISC can be used to report sales totaling $5,000 or more of consumer products to a person on a buy-sell, deposit-commission, or other commission basis for resale.
Be sure to report each payment in the proper box because the IRS uses this information to determine whether the recipient has properly reported the payment.
There are some notable exceptions to payments that are not required to be reported on a Form 1099-NEC, although they may be taxable to the recipient. These include, but are not limited to the following:
- Generally, payments made to a corporation (including an LLC this is treated as a C or S corporation).
- Payments for merchandise, telegrams, telephone, freight, storage, and similar items.
- Payments of rent to real estate agents or property managers.
- Wages, any bonuses, prizes, and awards paid to employees. This should be reported on Form W-2.
- Military differential wage payments made to employees while on active duty. This should be reported on Form W-2.
- Business travel allowances paid to employees. This may be reportable on Form W-2.
- Cost of current life insurance protection. This should be reported on Form W-2 or Form 1099-R.
- Payments made to a tax-exempt organization including tax-exempt trusts, the US, a state, DC, a US possession or territory, or foreign government.
- Payments made to or for homeowners from the HFA Hardest Hit Fund or similar state program. This should be reported on Form 1098-MA.
- Compensation for injuries or sickness by the Department of Justice as a public safety officer disability or survivor’s benefit, or under a state program that provides benefits for surviving dependents of a public safety officer who has died as the direct and proximate result of a personal injury sustained in the line of duty.
- Compensation for wrongful incarceration for any criminal offense for which there was a conviction under federal or state law.
However, there may be some exceptions to these exceptions. It is always best to consult your tax advisor to determine if you should send out a Form W-9 to request information to a payee.
See the instructions for Form 1099-NEC by the IRS for more details.
What information is reported on Form 1099-NEC?
Once you have determined who must receive a Form 1099-NEC, you can request their information through a Form W-9. Form W-9 , like Forms W-4 for employees, will provide you with the relevant information for the recipient such as their name, address, and tax identification number.
This form includes the name, address, and TIN of both the payer and the recipient. It includes a box for non-employee compensation amounts as well as a box for direct sales totaling more than $5,000 of products for resale. This form also includes boxes for state and federal taxes withheld.
Review what information is required using our companion article Gathering Information to Prepare Form 1099-NEC.
After retrieving a completed Form W-9 from the nonemployee, you will use the information provided and the finalized amounts paid to prepare a Form 1099-NEC.
Once you have submitted these forms to the IRS either electronically or via mail and have received your “Accepted” status, then you have met all of the IRS requirements for these forms.
If you’re looking for a broken-down 1099-MISC vs 1099-NEC guide in a downloadable format, make sure to download our PDF guide below.
BoomTax, The Boom Post, and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors prior to engaging in any transaction.