What Form 1099-NEC Is For
Form 1099-NEC (2022) is an Internal Revenue Service information return used by businesses to report payments made to independent contractors, freelancers, and self-employed service providers. If your company pays $600 or more during the calendar year for services performed by a nonemployee, you must file this form. It reports nonemployee compensation, including fees paid, commissions, and other forms of earned income. Independent contractors use the information to report income and pay self-employment taxes on their individual tax returns.
When You’d Use Form 1099-NEC
Businesses must file Form 1099-NEC when they pay $600 or more to an independent contractor or other nonemployee during the tax year. This includes payments for work performed, professional fees, or direct sales of $5,000 or more made for resale. The business pays these amounts in the course of trade or business, not for personal payments. If a payment card or third-party network handles the transaction, that income is instead reported on Form 1099-K. File and furnish the form by January 31 of the following year to comply with IRS requirements.
Key Rules or Details for 2022
- $600 threshold amount: You must report payments totaling $600 or more in nonemployee compensation during the tax year for services performed by independent contractors.
- Backup withholding: If a contractor fails to provide a taxpayer identification number, the business withholds federal income tax at a rate of 24 percent and reports it in Box 4 of the Form 1099.
- Who must file: Corporations, sole proprietorships, limited liability companies, and nonprofit organizations must file if they pay qualifying amounts to nonemployees.
- Exceptions: You do not file for employees who receive Form W-2, for personal payments, or for payments handled through third-party network transactions.
- Self-employment tax reporting: Independent contractors must report the compensation on Schedule SE when they pay self-employment taxes for Social Security and Medicare taxes.
- Electronic filing: File Form 1099-NEC electronically if you submit 10 or more information returns in the same tax year.
- Amended filing: If errors occur, file a corrected 1099 NEC form and mark the “CORRECTED” box rather than “VOID.”
- Recordkeeping: Keep copies of forms, receipts, and expense records for at least three years to support your income tax filings.
Browse more tax form instructions and filing guides in our Forms Hub.
Step-by-Step (High Level)
Step 1: Collect contractor information
Before paying for services, request Form W-9 from each independent contractor. This form provides their legal name, taxpayer identification number, and address for reporting purposes.
Step 2: Track all payments during the year
Record all amounts paid for work performed, including fees, commissions, and other compensation. Keep track of payment dates, services provided, and total earned income to ensure accurate records.
Step 3: Determine who needs a form
At the end of the calendar year, review your records to determine which service providers received at least $600 in compensation paid and require a Form 1099-NEC.
Step 4: Complete and file Form 1099-NEC
Fill out payer and recipient details, including the taxpayer identification number, total nonemployee compensation in Box 1, and any withheld federal income tax. File Form 1099 electronically or by mail by the due date.
Step 5: Send copies and keep records
Provide Copy B to the contractor by January 31. Retain Copy C for your records. Businesses should maintain accurate documentation of payments and expenses for review by the IRS, as needed.
Learn more about federal tax filing through our IRS Form Help Center.
Common Mistakes and How to Avoid Them
- Using the wrong form: Do not confuse Form 1099-NEC with Form 1099-MISC. Avoid this mistake by using Form 1099-NEC only for nonemployee compensation and using Form 1099-MISC for rents or royalties.
- Missing taxpayer identification number: Always collect Form W-9 before paying contractors. This prevents backup withholding and ensures accurate information reporting.
- Filing late: Submit all information returns by January 31. To avoid late penalties, mark this business day deadline on your tax calendar and file electronically.
- Reporting employees as contractors: Use Form W-2 for employees. To avoid misclassification penalties, determine whether a worker is an employee or an independent contractor before making any payments.
- Incorrect payment reporting: Include only amounts paid for services performed. Do not report merchandise or personal payments. Review totals carefully to prevent mismatched records.
- Failing to report withheld taxes: If you withhold federal income tax, report the amount in Box 4. Always verify that withheld amounts match your payment records.
- Not retaining documentation: Maintain copies of all forms, receipts, and information returns. Good recordkeeping helps resolve IRS inquiries and supports your income tax reporting.
Learn more about how to avoid business tax problems in our guide on How to File and Avoid Penalties.
What Happens After You File
After you file Form 1099-NEC, the IRS compares the compensation reported by businesses with the income declared by independent contractors on their income tax returns. Contractors report payments as self-employment income and pay self-employment taxes, which cover Social Security and Medicare. If mismatches occur, the IRS may issue notices requiring corrections or additional documentation. Businesses should keep filed forms and receipts for at least three years to address any inquiries that may arise. Timely filing ensures compliance and helps contractors properly report their taxable income.
FAQs
What federal income tax rules apply when I file Form 1099-NEC?
The business must report payments totaling $600 or more and withhold federal income tax if the contractor fails to provide a taxpayer identification number. This ensures proper tracking of income.
Do independent contractors pay self-employment tax on Form 1099-NEC income?
Yes, independent contractors report this self-employment income on Schedule SE and pay self-employment taxes, which include both Social Security and Medicare taxes for the tax year.
How is Form 1099-NEC different from Form 1099-MISC?
Form 1099-NEC reports nonemployee compensation, such as fees for services performed, while Form 1099-MISC reports other types of income, including rent or royalties paid to individuals or businesses.
What if I file Form 1099-NEC after the due date?
If you miss the January 31 deadline, file as soon as possible. Late filing penalties depend on how many days past the due date the IRS receives your form.
Do I need to file Form 1099-NEC for sales made directly to customers?
Yes, if you made direct sales totaling $5,000 or more of consumer goods for resale, report those on the Form 1099-NEC. Payment card or network payments go on Form 1099-K.
Can a limited liability company receive Form 1099-NEC?
Yes, a limited liability company that provides services and meets the $600 threshold must receive a Form 1099-NEC unless it is taxed as a corporation.
Should I file Form 1099-NEC or Form W-2 for workers?
File Form W-2 for employees and Form 1099-NEC for independent contractors. Determining the correct classification avoids incorrect reporting and potential Internal Revenue Service penalties.
