What Form 1099-NEC (2021) Is For
IRS Form 1099-NEC (2021) is used by businesses to report payments made to independent contractors and other self-employed individuals. It specifically reports nonemployee compensation, which includes fees for services performed by nonemployees. The IRS reinstated this form in 2020 to separate these payments from Form 1099-MISC, thereby simplifying the reporting and verification of income for federal income tax purposes.
A business must file Form 1099-NEC if it pays $600 or more during the calendar year to a contractor, consultant, or other service provider. This includes individuals, partnerships, and certain corporations, such as law firms. These payments are considered taxable income for the recipient and must be reported accurately to avoid penalties and ensure proper filing of self-employment tax, Social Security, and Medicare taxes.
For a detailed breakdown of filing requirements, eligibility rules, and step-by-step instructions, see our comprehensive Form 1065-X: Amended Return or Administrative Adjustment Request (AAR) – A Complete Guide for 2021.
When You’d Use Form 1099-NEC
Businesses use Form 1099-NEC to report payments made to independent contractors and self-employed individuals for services performed during the calendar year. If a company pays $600 or more in nonemployee compensation, it must file Form 1099-NEC with the IRS. The payer must also furnish a paper copy or e-file version to the contractor by the due date, typically January 31 of the following tax year. Filing on time and in the proper format helps avoid penalties and ensures accurate reporting of taxable income.
If errors occur or the form is filed late, businesses should correct and file electronically using the IRS Information Returns Intake System or the FIRE platform. Filing a corrected return helps maintain compliance and prevents potential tax liability issues related to reported payments and compensation paid.
Key Rules or Details for 2021
For the 2021 tax year, businesses must file Form 1099-NEC to report nonemployee compensation of $600 or more paid to independent contractors, partnerships, or estates. Payments to corporations are generally excluded, except for those made to attorneys providing legal services. The IRS requires reporting of all compensation paid during the calendar year for services performed, ensuring accuracy in taxpayer identification numbers and total amounts reported.
Payments such as rent paid, personal payments, or other compensation not related to business activities should not be reported on Form 1099-NEC. Businesses can file electronically through the Information Returns Intake System (FIRE platform to meet the January 31 due date. Filing in the proper format and maintaining complete records helps reduce penalties, verify income, and ensure compliance with federal income tax and self-employment tax requirements.
For complete details on wage reporting, withholdings, and unemployment tax filings, see our guide for Information Returns & Reporting Forms.
Step-by-Step (High Level)
Step 1: Gather information
Collect Form W-9 from each contractor to obtain the taxpayer identification number and the correct legal name. Record all payments made for services during the calendar year, including dates and total compensation paid.
Step 2: Determine who needs forms
Review payment records to find contractors, partnerships, or estates that received $600 or more in nonemployee compensation. Exclude corporations unless the business pays an attorney or law firm for legal services.
Step 3: Complete the form
Enter payer and recipient details, including name, address, and taxpayer identification number. Report nonemployee compensation, any federal income tax withheld, and ensure all information follows the proper IRS format.
Step 4: File with the IRS
File Form 1099-NEC electronically through the IRS FIRE or IRIS intake system, or send a paper copy with Form 1096. Ensure it is submitted by the January 31 due date or the next business day if the deadline falls on a weekend.
Step 5: Furnish copies to recipients
Provide Copy B to each contractor by January 31. Send copies electronically or by mail so recipients can include the income on their tax return and report it correctly for self-employment and federal income tax purposes.
Step 6: Maintain records and handle corrections
Keep copies, payment details, and related records for at least three years. If an error occurs, file a corrected Form 1099-NEC using the “CORRECTED” box and resubmit electronically or by paper in the proper format.
Common Mistakes and How to Avoid Them
Filing Form 1099-NEC requires accuracy and attention to detail. Some of the most common errors include:
- Providing an incorrect taxpayer identification number. Always verify contractor information using Form W-9 before making payments.
- Reporting personal payments or non-business transactions. Form 1099-NEC should only report payments made in the course of business.
- Using Form 1099-MISC for nonemployee compensation. All payments for services performed by nonemployees must be reported on Form 1099-NEC.
- Selecting the VOID box on a corrected return. Always choose “CORRECTED” instead.
- Missing the January 31 deadline. Setting calendar reminders and maintaining accurate records can prevent late filing penalties.
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 businesses file Form 1099-NEC, the IRS matches the information against the contractor’s tax return to confirm all income and deductions are reported correctly. Both the payer and recipient should keep accurate records, including taxpayer identification numbers and total amounts paid, for at least three years. Contractors must report their income on their tax return and pay federal income tax, self-employment tax, Social Security tax, and Medicare tax. Maintaining organized records ensures the IRS can verify wages, fees, and other compensation reported throughout the tax year.
For employers, keeping proof of all filings and correspondence reduces the risk of penalties or backup withholding notices. For self-employed individuals, reviewing each 1099 NEC to report income ensures compliance and accurate calculation of deductions and tax liability.
FAQs
What if a contractor is paid less than $600?
If a contractor is paid under $600 in a calendar year, the business does not need to file Form 1099-NEC. However, accurate payment records should still be kept for income verification and potential IRS review.
Do corporations receive Form 1099-NEC?
Corporations typically do not receive Form 1099-NEC, except when a business pays an attorney or law firm for legal services. These payments must be reported regardless of the firm’s business structure.
How can an error be corrected?
To fix an error, file a corrected Form 1099-NEC using the “CORRECTED” box, not “VOID.” Submit it through the IRS FIRE or IRIS system and provide the contractor with an updated paper copy.
Are payments made through PayPal or credit cards reported to the relevant authorities?
Payments made by PayPal or other third-party processors are not reported on Form 1099-NEC. These transactions are reported separately by the processor on Form 1099-K.
What taxes apply to nonemployee income?
Nonemployee income reported on Form 1099-NEC is subject to federal income tax, self-employment tax, and Medicare taxes. Contractors report this income and related deductions on their tax return.
How long should payers keep records?
Businesses should retain all filed forms, receipts, and taxpayer identification records for a minimum of three years after the filing date. Keeping complete records supports accuracy in future filings and responses to IRS notices.
