Form 1099-NEC: Nonemployee Compensation (2021 Tax Year) – A Complete Guide
What Form 1099-NEC Is For
Form 1099-NEC (Nonemployee Compensation) is the IRS form businesses use to report payments made to independent contractors, freelancers, and other non-employees. If you paid someone $600 or more during 2021 for services they provided to your business—and that person wasn't your employee—you likely need to file this form.
The IRS reintroduced Form 1099-NEC in 2020 (for the 2020 tax year) after nonemployee compensation had been reported on Form 1099-MISC for years. The change was made to simplify reporting and align with an earlier January 31 filing deadline that Congress mandated in the PATH Act of 2015. By creating a separate form specifically for nonemployee compensation, the IRS made it easier for businesses to meet their obligations without juggling different deadlines for different types of payments. IRS.gov
Common Scenarios Requiring Form 1099-NEC
Common scenarios requiring Form 1099-NEC include: paying a freelance graphic designer, hiring an independent consultant, compensating an attorney for legal services (even if the attorney works for a corporation), or paying a contractor for home repairs in the course of your business. The key distinction is that these payments are made in the course of your trade or business—personal payments don't require reporting.
What the Form Captures
Box 1 of Form 1099-NEC captures the total nonemployee compensation paid during the year. The form also includes boxes for reporting direct sales of $5,000 or more (Box 2), federal and state income tax withheld (if backup withholding applied), and state tax information.
When You’d Use Form 1099-NEC (Including Late and Amended Filings)
For tax year 2021, you must file Form 1099-NEC with the IRS by January 31, 2022—whether you file on paper or electronically. This unified deadline is different from many other 1099 forms. You must also furnish a copy to each recipient (the person or business you paid) by the same January 31 deadline. IRS.gov
If you discover an error after filing—perhaps you reported the wrong amount, used an incorrect taxpayer identification number (TIN), or forgot to file a form altogether—you'll need to file a corrected Form 1099-NEC. For paper corrections, follow the instructions in Part H of the General Instructions for Certain Information Returns. Mark the "CORRECTED" box at the top of the form, but don't check the "VOID" box (checking VOID tells IRS scanners to ignore the form). For electronic corrections, use IRS Publication 1220 guidelines or the FIRE System. If you originally filed electronically, your corrections must also be electronic. IRS.gov
Late filings happen—maybe you didn't realize you had to file, or you missed the deadline. The sooner you file after realizing your mistake, the lower the penalty. Filing within 30 days of the deadline results in a smaller penalty than filing months later. Even if you're late, filing is always better than not filing at all, as penalties continue to increase and can compound with other issues.
Key Rules or Details for 2021
The $600 Threshold
Several important rules govern Form 1099-NEC for 2021:
The $600 threshold: You must file if you paid $600 or more during the calendar year for services performed by a non-employee. This includes parts and materials if they're part of the service payment. The threshold applies to the aggregate total for the year, not individual payments. IRS.gov
Trade or Business Requirement
Trade or business requirement: You only report payments made in the course of your trade or business. Personal payments—like hiring someone to paint your personal residence—aren't reportable. However, nonprofit organizations, qualified pension plans, and government agencies are considered engaged in a trade or business and must report.
Corporate Exception — With a Crucial Catch
Corporate exception—with a crucial catch: Generally, you don't need to file 1099-NEC for payments to corporations. But there's a major exception: payments to attorneys must always be reported, even if the attorney is incorporated. This includes law firms and other legal service providers. Medical and health care payments to corporations also require reporting (though on Form 1099-MISC, not 1099-NEC). IRS.gov
Electronic Filing Mandate
Electronic filing mandate: If you file 10 or more information returns of any type during the year (combining all 1099 forms, W-2s, etc.), you must file electronically. The IRS was authorized to lower this threshold, but for 2021 returns filed in 2022, the 250-return threshold remained in effect.
Backup Withholding
Backup withholding: If a contractor fails to provide their TIN or the IRS notifies you that the TIN is incorrect, you must withhold 24% of payments (for 2021) and report the withheld amount in Box 4 of Form 1099-NEC. You must file the form regardless of the payment amount if any backup withholding occurred.
Step-by-Step (High Level)
Step 1: Gather Information Throughout the Year
Step 1: Gather information throughout the year. When you hire an independent contractor, have them complete Form W-9 (Request for Taxpayer Identification Number and Certification) immediately. This provides their legal name, business name (if applicable), TIN (Social Security Number or Employer Identification Number), and address. Keep these on file—chasing down information in January is stressful and contractors may be unresponsive. IRS.gov
Step 2: Review Your Records Before Year-End
Step 2: Review your records before year-end. In late December, review all contractors paid during 2021. Calculate total payments to each. Identify anyone who received $600 or more and determine if they require Form 1099-NEC (apply the corporate exception, but remember attorneys must be reported regardless). Verify you have accurate TIN information for everyone.
Step 3: Prepare the Forms
Step 3: Prepare the forms. You can purchase scannable forms from office supply stores or use IRS-approved accounting software. Complete Copy A (red scannable copy for the IRS), Copy B (for the recipient), Copy 1 (for state tax departments if applicable), and Copy C (for your records). For each recipient, include: recipient's name, address, and TIN; your business name, address, and TIN; and the total compensation in Box 1.
Step 4: File with the IRS by January 31
Step 4: File with the IRS by January 31. Paper filers must include Form 1096 (Annual Summary and Transmittal) with all Forms 1099-NEC and mail to the appropriate IRS Submission Processing Center based on your state. Electronic filers use the FIRE System (Filing Information Returns Electronically) or approved software. The January 31 deadline applies to both methods. IRS.gov
Step 5: Furnish Recipient Copies by January 31
Step 5: Furnish recipient copies by January 31. Give or mail Copy B to each contractor by January 31, 2022. You can furnish statements electronically if the recipient consents. Keep Copy C with your tax records for at least three years.
Common Mistakes and How to Avoid Them
Missing the January 31 Deadline
Missing the January 31 deadline: Unlike Form 1099-MISC (which has different deadlines depending on what's being reported), Form 1099-NEC has a single, firm January 31 deadline for both IRS filing and recipient furnishing. Mark your calendar for mid-January to allow processing time. Starting early prevents last-minute scrambles when you discover missing information.
Using the Wrong Form
Using the wrong form: Nonemployee compensation goes on Form 1099-NEC, not 1099-MISC. In 2020, the IRS separated these forms. Double-check that you're using the current year's form (2021 form for 2021 payments) as the IRS updates forms annually.
Incorrect or Missing TINs
Incorrect or missing TINs: Reporting an incorrect TIN or failing to report one triggers automatic penalties. Always collect Form W-9 before making payments. The IRS offers TIN Matching, a free service that lets you verify name-TIN combinations before filing, which helps avoid backup withholding notices and penalties. IRS.gov
Confusing Employees with Contractors
Confusing employees with contractors: Employees receive Form W-2, not Form 1099-NEC. If you have control over how, when, and where someone works, provide them with tools and equipment, and pay them hourly or salary, they're likely an employee. Misclassifying employees as contractors to avoid payroll taxes is illegal and triggers significant penalties.
Forgetting About the Attorney Exception
Forgetting about the attorney exception: Many businesses skip filing for corporations, forgetting that attorney payments must always be reported, even for incorporated law firms. This mistake generates IRS notices. When in doubt about legal services, file the form.
Checking the VOID Box on Corrections
Checking the VOID box on corrections: When filing a corrected form, never check the VOID box. Check only the CORRECTED box at the top of the form. Checking VOID tells the IRS to ignore the entire form, so your correction won't be processed. Use VOID only when completely eliminating a form filed in error.
Waiting Too Long to Correct Errors
Waiting too long to correct errors: If you discover an error in February, correct it immediately. Penalty tiers are based on how quickly you correct mistakes. The difference between correcting within 30 days versus waiting until summer can mean $60 more per form in penalties. IRS.gov
What Happens After You File
IRS Matching
After you file Form 1099-NEC with the IRS and furnish copies to recipients, several things occur:
IRS matching: The IRS matches the information you reported against the tax returns filed by the contractors who received your payments. If a contractor fails to report the income you documented on Form 1099-NEC, the IRS will send them a notice. This matching process is why accurate TINs are so critical.
Contractor Tax Obligations
Contractor tax obligations: Recipients use Form 1099-NEC to prepare their tax returns. Self-employed individuals typically report this income on Schedule C (Profit or Loss from Business) of their Form 1040. The income is subject to both income tax and self-employment tax (Social Security and Medicare). Contractors may need to make quarterly estimated tax payments to avoid underpayment penalties.
Record Retention
Record retention: Keep Copy C of all Forms 1099-NEC with your tax records for at least three years from the filing date. The IRS recommends keeping them longer if they relate to property or other situations requiring extended record retention. These records are crucial if the IRS questions your business deductions.
Potential IRS Notices
Potential IRS notices: If you made errors—wrong amounts, incorrect TINs, missing forms—the IRS will send notices. CP2100 or CP2100A notices inform you of TIN/name mismatches and may require backup withholding on future payments. Penalty notices (Letter 972CG or similar) assess specific dollar amounts for filing failures. Respond to all IRS notices promptly, even if you disagree. IRS.gov
State Tax Reporting
State tax reporting: Many states require information returns similar to federal Form 1099-NEC. Copy 1 is specifically designated for state tax departments. Check your state's requirements, as deadlines and procedures may differ from federal rules.
Business Deductions
Business deductions: The payments you reported on Form 1099-NEC typically represent business deductions on your tax return. Proper documentation (the 1099-NEC forms you filed plus underlying invoices and payment records) substantiates these deductions if the IRS audits your business.
FAQs
Q1: Do I need to file Form 1099-NEC for payments made through PayPal, Venmo, or credit cards?
No. Payments made through payment cards, third-party network transactions, and other payment settlement entities are reported on Form 1099-K by the payment processor. You don't need to issue Form 1099-NEC for these payments. However, if you paid someone $600 or more through methods like check, cash, direct deposit, or wire transfer, you must file Form 1099-NEC. IRS.gov
Q2: What happens if a contractor refuses to provide their Social Security Number or Tax ID?
If a contractor won't provide their TIN, you must begin backup withholding at 24% on all payments (for 2021). Report the withheld amount in Box 4 of Form 1099-NEC. You must file the form regardless of whether the payments totaled $600 or more. The contractor is legally required to provide their TIN (they can use Form W-9), and refusing can result in penalties against them under Section 6723. IRS.gov
Q3: I paid $500 to one contractor in 2021. Do I still need to file?
No. The $600 threshold means you only file Form 1099-NEC if the total payments to that contractor during 2021 reached $600 or more. Payments under $600 don't require Form 1099-NEC. However, keep records of all contractor payments for your own business deduction documentation.
Q4: What are the penalties if I don't file or file late?
For 2021, penalties are tiered based on how late you file: $50 per form if you file correctly within 30 days (maximum $571,000 per year, or $199,500 for small businesses); $110 per form if you file more than 30 days late but by August 1 (maximum $1,713,000 per year, or $571,000 for small businesses); $280 per form if you file after August 1 or don't file at all (maximum $3,426,000 per year, or $1,142,000 for small businesses). If your failure is due to intentional disregard, the penalty is at least $570 per form with no maximum. These penalties apply separately for failing to file with the IRS and failing to furnish statements to recipients. IRS.gov
Q5: Can I file Form 1099-NEC electronically? Is it required?
Yes, you can file electronically through the IRS FIRE System or approved tax software. Electronic filing is required if you file 10 or more information returns of any type during the year. Even if not required, electronic filing is often easier, faster, and reduces errors. The January 31 deadline applies equally to paper and electronic filings for Form 1099-NEC. IRS.gov
Q6: I paid an LLC. Do I need to file Form 1099-NEC?
It depends on how the LLC is taxed. If the LLC is taxed as a sole proprietorship (single-member LLC) or partnership, yes, you must file Form 1099-NEC. If the LLC elected to be taxed as a C corporation or S corporation, generally no—except for attorney fees, which must always be reported even when paid to corporations. When collecting Form W-9, ask the LLC to indicate their tax classification to determine your reporting obligation.
Q7: What if I discover I reported the wrong amount after January 31?
File a corrected Form 1099-NEC as soon as you discover the error. Check the "CORRECTED" box at the top of the form, enter the correct information, and file it with the IRS. Also furnish a corrected statement to the recipient. The IRS has a safe harbor for de minimis errors: if the difference between what you reported and the correct amount is $100 or less (and withholding differences are $25 or less), you don't need to file a correction unless the recipient requests one. IRS.gov
