Form 1099-NEC: Nonemployee Compensation – Complete Guide for 2023

What Form 1099-NEC Is For

Form 1099-NEC is one of the most important tax forms for businesses and independent contractors. Whether you're a business owner who hires freelancers or a self-employed professional receiving payments, understanding this form is crucial for staying compliant with IRS requirements. This guide breaks down everything you need to know about Form 1099-NEC for tax year 2023 in plain language.

Form 1099-NEC (Nonemployee Compensation) is an information return used to report payments made to independent contractors, freelancers, and other non-employees who provided services to your business. The IRS reintroduced this separate form in 2020 specifically for reporting nonemployee compensation, which was previously reported on Form 1099-MISC.

If you paid someone $600 or more during the calendar year for services rendered in the course of your trade or business, and that person is not your employee, you generally must file Form 1099-NEC. This includes payments to independent contractors, consultants, freelancers, attorneys (for their services), directors' fees, and other service providers.

The form serves two critical purposes: it informs the IRS of payments you made (so they can verify income reporting), and it provides the service provider with documentation they need to file their own tax return. The payer files Copy A with the IRS, provides Copy B to the recipient, and keeps Copy C for their records.

Form 1099-NEC is only for reporting payments made in the course of your trade or business. Personal payments—such as paying someone to mow your home lawn—are not reportable. However, nonprofit organizations, qualified pension plans, tax-exempt organizations, farmers' cooperatives, and government agencies are all considered to be engaged in a trade or business and must file these forms when applicable.

When You’d Use Form 1099-NEC (Including Late and Amended Filings)

Regular Filing Timeline: For tax year 2023, Form 1099-NEC must be filed with the IRS and furnished to recipients by January 31, 2024. This strict deadline applies whether you're filing on paper or electronically. This is notably different from Form 1099-MISC, which has later deadlines (February 28 for paper filers, March 31 for electronic filers).

Extension Requests: Unlike some other tax forms, there is no automatic extension available for Form 1099-NEC. However, you can request a 30-day extension by filing Form 8809 (Application for Extension of Time to File Information Returns) by the original January 31 deadline. Under certain hardship conditions, you may apply for an additional 30-day extension. Extension requests can be submitted on paper or electronically through the FIRE System or IRIS portal.

For requesting extensions of time to furnish statements to recipients (Copy B), you must submit your request via fax only to the IRS.

Amended/Corrected Returns: If you discover errors after filing your original Form 1099-NEC, you must file a corrected return. To correct a previously filed form, complete a new Form 1099-NEC with the correct information and check the "CORRECTED" box at the top. Include all information fields, not just the corrected items.

Critical mistake to avoid: Do NOT check the "VOID" box when filing a correction. The VOID box tells IRS scanning equipment to ignore the form entirely, meaning your correction won't be processed. The VOID box is only used when submitting multiple forms together and one needs to be voided.

For paper corrections, follow the procedures in Part H of the General Instructions for Certain Information Returns. For electronic corrections, use Publication 1220 (FIRE system), Publication 5718 (IRIS Application to Application), or Publication 5717 (IRIS Portal).

Key Rules and Requirements for 2023

Reporting Threshold: You must file Form 1099-NEC if you paid $600 or more to a non-employee for services during 2023. You must also file if you withheld any federal income tax under backup withholding rules, regardless of the payment amount.

Who Must Receive a 1099-NEC:

• Independent contractors, freelancers, and consultants
• Attorneys for legal services (even if paid to a corporation)
• Directors receiving fees for their services
• Individuals receiving commissions
• Anyone from whom you backup withheld taxes

Corporation Exception (with Important Exceptions): Generally, you don't need to report payments to corporations. However, you MUST report payments to corporations for attorney fees and legal services. The IRS specifically removed the corporate exemption for legal services to ensure proper reporting.

What Goes in Box 1: Box 1 (Nonemployee Compensation) should include the total amount paid for services. This includes fees, commissions, prizes and awards for services, and other compensation. The recipient will report this income on Schedule C (business income) or Schedule F (farm income) and will typically owe self-employment tax on these amounts.

Important: What Does NOT Go in Box 1:

• Payments for merchandise, supplies, or equipment
• Rent payments (use Form 1099-MISC Box 1)
• Royalties (use Form 1099-MISC Box 2)
• Medical and healthcare payments (use Form 1099-MISC Box 6)
• Gross proceeds paid to attorneys in settlement cases (use Form 1099-MISC Box 10)
• Payments reported on Form W-2 (employees)

Taxpayer Identification Number (TIN) Requirements: You must obtain the recipient's TIN—either their Social Security Number (SSN) or Employer Identification Number (EIN)—before filing. Use Form W-9 (Request for Taxpayer Identification Number and Certification) to collect this information. If the recipient fails to provide their TIN, you must backup withhold 24% from payments and report the withholding in Box 4.

Electronic Filing Requirements: Starting with returns required to be filed in 2024 (for tax year 2023), if you file 10 or more information returns of any type combined, you must file electronically. Prior to 2024, the threshold was 250 returns. The IRS offers free electronic filing through the IRIS portal, or you can use the FIRE system.

Step-by-Step (High Level)

Step 1: Determine Who Needs a Form

Review all your 2023 payments to non-employees. Anyone who received $600 or more for services needs a Form 1099-NEC. Gather your payment records, invoices, and contractor information.

Step 2: Collect Taxpayer Information

Before year-end (ideally when you first hire someone), have each contractor complete Form W-9. This provides their legal name, business name (if applicable), address, and TIN. Verify that the TIN format is correct: SSNs should be XXX-XX-XXXX, EINs should be XX-XXXXXXX.

Step 3: Obtain an Employer Identification Number (EIN)

If you haven't previously filed information returns, you'll need an EIN for your business. You can apply online at IRS.gov, and most applicants receive their EIN immediately.

Step 4: Complete the Form

For each recipient, fill out Form 1099-NEC including:

• Your business information (payer) in the top left
• Recipient's TIN, name, and address
• Box 1: Total nonemployee compensation paid in 2023
• Box 2: Check this box only if you paid $5,000+ in direct sales of consumer products for resale
• Box 4: Federal income tax withheld (if applicable under backup withholding)
• State information (Boxes 5-7) if your state requires it

Step 5: File with the IRS

• Electronic filers: Submit through IRIS (free) or FIRE system by January 31, 2024
• Paper filers: Send Copy A of all Forms 1099-NEC along with Form 1096 (transmittal form) to the appropriate IRS processing center by January 31, 2024. The mailing address depends on your business location (see IRS instructions for specific addresses).

Step 6: Provide Copies to Recipients

Furnish Copy B to each recipient by January 31, 2024. You can mail them, deliver them in person, or email them (with recipient consent). Keep Copy C for your records.

Step 7: Maintain Records

Retain copies of all Forms 1099-NEC and supporting documentation for at least three years, though keeping them longer is advisable for potential audits.

Common Mistakes and How to Avoid Them

Mistake #1: Using the Wrong Form

Many businesses mistakenly report nonemployee compensation on Form 1099-MISC instead of Form 1099-NEC. Since 2020, nonemployee compensation has its own dedicated form with a strict January 31 deadline. Using the wrong form can result in penalties.

How to avoid it: If you're reporting payments for services to a non-employee, use Form 1099-NEC. Use Form 1099-MISC only for rents, royalties, other income, or attorney gross proceeds.

Mistake #2: Reporting Payments in the Wrong Box

The IRS matches information return data to recipient tax returns by specific boxes. If you report nonemployee compensation in the wrong box, it creates discrepancies that trigger notices.

How to avoid it: Carefully review what belongs in each box according to IRS instructions. When in doubt, consult the specific instructions for the form.

Mistake #3: Missing or Incorrect TINs

Failing to obtain valid TINs is one of the most common errors. Incorrect TIN formats, transposed numbers, or mismatches between names and TINs all cause problems.

How to avoid it: Collect Form W-9 before making any payments. Verify TIN format and consider using the IRS TIN Matching service to validate information before filing. If you cannot obtain a TIN despite reasonable efforts, you must backup withhold.

Mistake #4: Missing the January 31 Deadline

Form 1099-NEC has an earlier deadline than most other 1099 forms. Late filing triggers automatic penalties.

How to avoid it: Mark your calendar for January 31. Start gathering information in December. If you need more time, file Form 8809 for an extension by the original deadline.

Mistake #5: Incorrectly Checking the VOID Box

When filing corrections, some businesses mistakenly check the VOID box, thinking it will void the incorrect information. This actually causes the IRS to ignore the entire form.

How to avoid it: Only check the VOID box when you're submitting multiple forms together and one specific form needs to be completely voided. For corrections, check the CORRECTED box instead.

Mistake #6: Truncating TINs on IRS Copies

While you're allowed to truncate (partially hide) recipient TINs on the copies you give to recipients, you cannot truncate TINs on forms filed with the IRS.

How to avoid it: Always include complete, untruncated TINs on Copy A filed with the IRS. Only truncate on recipient statements (Copy B).

Mistake #7: Not Reporting Payments to Corporate Attorneys

The general rule is that you don't report payments to corporations, but attorney fees are a critical exception.

How to avoid it: Always issue Form 1099-NEC for attorney fees, regardless of whether the attorney is incorporated.

What Happens After You File

IRS Processing

Once you file Form 1099-NEC, the IRS enters the information into their system. They use this data to cross-reference with the recipient's tax return to ensure income is properly reported. This matching process is a key component of IRS compliance efforts.

Information Matching Program

The IRS runs sophisticated computer programs that match the income you report on Form 1099-NEC with what the recipient reports on their tax return (typically Schedule C). If there's a discrepancy—the recipient doesn't report the income, underreports it, or reports a different amount—the IRS generates a notice.

Potential Notices You Might Receive

If you file a Form 1099-NEC with missing or incorrect TIN information, you'll receive a CP2100 or CP2100A notice from the IRS. This notice informs you of the problem and requires you to conduct "B Notice" procedures—soliciting correct TIN information from the recipient. If you receive two such notices within three years for the same recipient, you can check the "2nd TIN Not." box on future forms.

Recipient Requirements

The person who receives the Form 1099-NEC must report this income on their tax return. Self-employed individuals typically report it on Schedule C (Profit or Loss from Business) or Schedule F (for farmers). The income is subject to both income tax and self-employment tax (Social Security and Medicare), which is currently 15.3% on net earnings.

Recipients can deduct business expenses against this income, but they must pay estimated taxes quarterly if they expect to owe $1,000 or more in taxes for the year.

Audit Considerations

Having proper Form 1099-NEC documentation protects you in an audit. It demonstrates that you correctly classified workers as independent contractors rather than employees and that you fulfilled your reporting obligations. Keep all supporting documentation including invoices, contracts, and Form W-9s.

State Tax Implications

Many states require their own reporting of nonemployee compensation or use IRS data-sharing agreements. Boxes 5-7 on Form 1099-NEC allow you to report state tax information. Check your state's requirements for additional filing obligations.

FAQs

Q1: Do I need to file Form 1099-NEC for payments under $600?

No, the $600 threshold is the minimum for reporting. However, if you withheld any federal income tax under backup withholding rules, you must file Form 1099-NEC regardless of the payment amount. While you're not required to file for amounts under $600, some businesses choose to file for all payments for their own recordkeeping purposes.

Q2: What's the difference between Form 1099-NEC and Form 1099-MISC?

Form 1099-NEC specifically reports nonemployee compensation (payments for services). Form 1099-MISC reports other types of payments including rents, royalties, prizes, awards, medical and healthcare payments, and gross proceeds paid to attorneys. The forms have different filing deadlines: Form 1099-NEC is due January 31, while Form 1099-MISC (depending on boxes used) is due February 28 for paper filers or March 31 for electronic filers.

Q3: What are the penalties for filing Form 1099-NEC late or incorrectly?

For 2023 returns, penalties vary based on how late you file:

$50 per form if filed 1-30 days late (maximum $630 per form for intentional disregard)
$110 per form if filed 31 days late through August 1
$290 per form if filed after August 1 or not filed at all
$580 per form for intentional disregard (no maximum)

Small businesses face lower maximum penalties than large businesses. There's no maximum penalty for intentional disregard. Separate penalties apply for failing to furnish correct recipient statements. The IRS may waive penalties if you can demonstrate reasonable cause.

Q4: Do I need to report payments to corporations?

Generally, no. Payments to corporations are exempt from Form 1099-NEC reporting. However, there's a critical exception: you MUST report payments to attorneys and law firms for legal services, even if they're incorporated. This exception ensures proper reporting of attorney fees regardless of business structure.

Q5: What if the contractor didn't provide a Form W-9 or TIN?

If a contractor refuses or fails to provide their TIN, you must backup withhold 24% from payments. Report the gross payment in Box 1 and the withheld amount in Box 4 of Form 1099-NEC. Continue attempting to obtain the TIN through "B Notice" procedures. You may face penalties for failing to obtain TINs, but you can avoid them by showing reasonable cause and that you acted responsibly.

Q6: Can I file Form 1099-NEC electronically for free?

Yes. The IRS offers the IRIS (Information Reporting Intake System) portal, which allows you to file Form 1099-NEC and other information returns electronically at no cost. IRIS is particularly helpful for businesses filing smaller volumes of forms. For larger volumes, you can use the FIRE (Filing Information Returns Electronically) system, though it requires specific software or a third-party vendor.

Q7: What if I discover an error after filing?

File a corrected Form 1099-NEC as soon as you discover the error. Complete a new form with all correct information and check the CORRECTED box at the top. Do not check the VOID box—that will cause the IRS to ignore your correction entirely. Send the corrected form to the IRS and provide a corrected copy to the recipient. The IRS won't penalize you for filing corrections if you do so promptly after discovering the error.

Sources

All information in this guide comes from official IRS sources including:

IRS.gov Form 1099-NEC information pages
Instructions for Forms 1099-MISC and 1099-NEC (Publication i1099mec)
General Instructions for Certain Information Returns (Publication i1099gi)
IRS Information Return Penalties guidance

For the most current information and forms, visit IRS.gov/Form1099NEC.

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