What Form 1099-NEC Is For
Form 1099-NEC (2021) is used by businesses to report payments made to an independent contractor or other nonemployees who provided services during the tax year. The Internal Revenue Service requires that businesses issue this form when total compensation paid equals or exceeds the $600 threshold amount. The form helps ensure the proper reporting of taxable income and federal income tax for independent contractors, sole proprietorships, limited liability companies, and other service providers working outside traditional employment settings.
When You’d Use Form 1099-NEC
A business must file Form 1099-NEC when it pays an independent contractor $600 or more for services performed during the calendar year. The company pays this compensation in the course of trade or business activities, not for personal payments. Common examples include fees paid to consultants, freelancers, or attorneys. The due date to file Form 1099-NEC and furnish copies to recipients is January 31, 2022. Filing late can increase your tax liability and result in additional penalties.
Key Rules or Details for 2021
- $600 reporting threshold: You must report payments of $600 or more to independent contractors or nonemployees for services performed during the year, including related materials or supplies.
- Electronic filing threshold: If your business files ten or more information returns, you must file electronically using the IRS FIRE system or approved software.
- Backup withholding rules: If a payee does not provide a taxpayer identification number or gives an incorrect one, you must withhold 24% of payments for federal income tax.
- Direct sales reporting: Businesses must report direct sales of $5,000 or more of consumer goods for resale outside permanent retail establishments.
- Filing options: Businesses can file Form 1099-NEC electronically or by paper. Filing electronically ensures faster processing and reduces errors in income reporting.
- Pandemic-year considerations: For the 2021 tax year, many taxpayers still had stimulus-related earned income adjustments or self-employment tax deferrals from previous COVID-19 relief measures.
- Due date consistency: Both IRS and recipient copies must be submitted by January 31, 2022, whether you file electronically or on paper.
- Social Security and Medicare taxes: Nonemployee compensation is subject to self-employment taxes that include both Social Security and Medicare contributions. Contractors report these on Schedule SE.
Browse more tax form instructions and filing guides in our Forms Hub.
Step-by-Step (High Level)
Step 1: Collect contractor information
Before making any payments, have each independent contractor complete Form W-9. This provides their legal name, taxpayer identification number, and address to ensure accurate reporting for the Internal Revenue Service.
Step 2: Review all annual payments
At the end of the calendar year, total all compensation paid to each service provider. Determine if any amounts paid reach or exceed the threshold amount required for a Form 1099-NEC filing.
Step 3: Prepare the form
Use official IRS forms or approved software to report each contractor’s compensation paid. Include the business name, payer TIN, contractor’s information, and total amounts paid during the tax year.
Step 4: File Form 1099-NEC with the IRS
Businesses can file electronically or by mail. If filing by paper, attach Form 1096. The due date is January 31, 2022, or the next business day if that date falls on a weekend.
Step 5: Furnish copies to recipients
Send Copy B of Form 1099-NEC to independent contractors by January 31, 2022. Independent contractors will use this information to report payments on their individual tax returns and pay self-employment taxes.
Learn more about federal tax filing through our IRS Form Help Center.
Common Mistakes and How to Avoid Them
- Missing the filing deadline: Mark your calendar for January 31 and file Form 1099-NEC early. Setting reminders and verifying data before submission helps prevent penalties.
- Reporting the wrong form: Use Form 1099-NEC for nonemployee compensation, not Form 1099-MISC. Review the IRS instructions carefully to determine the correct filing type each tax year.
- Incorrect taxpayer identification numbers: Always verify each contractor’s TIN using Form W-9 and cross-check it through the IRS TIN matching system to avoid mismatched reporting.
- Misclassifying employees as contractors: Carefully determine work relationships to avoid legal issues. Employees receive a W-2, while independent contractors receive Form 1099-NEC. When uncertain, review IRS guidance or consult a tax professional.
- Not reporting attorney or legal fees: Businesses must file Form 1099-NEC for payments made to attorneys, even when the payments are made to corporations. Review all fees paid to ensure compliance with applicable regulations.
- Filing without backup withholding when required: If a contractor fails to provide a valid TIN, begin 24% withholding immediately and report the withheld federal income tax in Box 4.
- Failing to correct errors promptly: If mistakes are found after filing, file a corrected form immediately. Mark only the “CORRECTED” box to update information without voiding the record.
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 matches reported income against tax returns filed by each contractor. Independent contractors report nonemployee compensation as self-employment income on Schedule SE and pay self-employment taxes, including Social Security and Medicare taxes. Businesses must retain records for a minimum of three years for verification purposes. Filing accurately ensures compliance and minimizes tax liability risks. Government agencies and nonprofit organizations may also need to file Form 1099-NEC for services performed by nonemployees.
FAQs
What is the difference between Form 1099-NEC and Form 1099-MISC for federal income tax?
Form 1099-NEC reports nonemployee compensation paid to independent contractors, whereas Form 1099-MISC reports miscellaneous information, such as rent or prizes unrelated to services performed.
Who must file Form 1099-NEC for independent contractors?
Any business or sole proprietorship that pays an independent contractor $600 or more for services performed during the calendar year must file Form 1099-NEC with the IRS.
What counts as nonemployee compensation on Form 1099-NEC?
Nonemployee compensation encompasses fees, commissions, and other forms of payment made for services rendered by contractors. These payments are subject to self-employment tax.
When should I file Form 1099-NEC, and how do I file it electronically?
File Form 1099-NEC by January 31, 2022. You can file electronically using the IRS FIRE system or approved e-file software for faster processing.
Are direct sales reported on Form 1099-NEC?
Yes, direct sales of $5,000 or more must be reported. This includes consumer goods sold outside permanent retail establishments where the recipient intends to resell them.
What taxes apply to 1099-NEC nonemployee compensation?
Independent contractors are required to pay self-employment taxes, which cover Social Security and Medicare contributions. These taxes are calculated on Schedule SE and filed with the tax return.
What happens if my business fails to file Form 1099-NEC?
If a business fails to file Form 1099-NEC by the due date, it may incur penalties from the Internal Revenue Service. Filing promptly helps avoid escalating fees and enforcement notices.
