Whether you're a freelancer, contractor, landlord, or business owner, understanding Form 1099-NEC is essential for tax compliance. This guide breaks down everything you need to know about the 2019 version of this important tax form in plain English.

What Form 1099-NEC Is For

Form 1099-NEC (Nonemployee Compensation) is an IRS tax document that businesses use to report payments made to independent contractors, freelancers, and other non-employees for services. Think of it as the business world's equivalent of a W-2 form, except it's for people who work for themselves rather than traditional employees.

The IRS announced this form's reintroduction in July 2019, bringing back a form that hadn't been used since the 1980s. Starting with the 2020 tax year (meaning payments made during calendar year 2020), businesses began using Form 1099-NEC to report nonemployee compensation that previously appeared in Box 7 of Form 1099-MISC. This change was designed to simplify reporting requirements and give nonemployee compensation its own dedicated form with a consistent January 31 deadline.

If your business paid someone $600 or more during the year for services—and that person wasn't your employee—you'll likely need to file Form 1099-NEC. This applies to payments to independent contractors, consultants, attorneys, accountants, freelancers, and other self-employed professionals who performed work for your business.

Source: IRS.gov

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

The standard deadline for filing Form 1099-NEC is January 31 of the year following the payment year. You must provide copies to both the contractor (the recipient) and the IRS by this date. Section 6071(c) of the tax code requires you to file Form 1099-NEC on or before January 31, using either paper or electronic filing procedures.

Late Filing

If you miss the January 31 deadline, you should still file as soon as possible. The IRS imposes penalties for late filing that increase the longer you wait. According to IRS guidance, penalties apply based on how late the filing is, and the sooner you submit after the deadline, the lower the penalty. Payers who need a 30-day extension to file Form 1099-NEC must meet specific criteria listed on Form 8809, Application for Extension of Time to File Information Returns.

Amended/Corrected Returns

If you discover an error after filing—such as an incorrect Social Security number, wrong payment amount, or misspelled name—you need to file a corrected Form 1099-NEC. To correct a paper form, use a regular Form 1099-NEC and check the "CORRECTED" box at the top. Never check the "VOID" box for corrections, as the IRS scanning equipment will ignore voided forms entirely. Send the corrected form to the IRS, the contractor, and any applicable state tax agencies. For electronic corrections, consult Publication 1220 for FIRE system corrections, Publication 5718 for IRIS Application to Application corrections, or Publication 5717 for IRS Portal corrections.

Source: IRS.gov

Key Rules for 2019 (and Implementation for 2020)

The $600 Threshold: You must file Form 1099-NEC if you paid an individual, partnership, estate, or certain corporations at least $600 during the tax year for services performed in your trade or business. The form requires reporting if four conditions are met: (1) you made the payment to someone who is not your employee, (2) you made the payment for services in the course of your trade or business, (3) you made the payment to an individual, partnership, estate, or in some cases a corporation, and (4) you made payments to the payee of at least $600 during the year.

Who Gets Reported: The form applies to payments made to independent contractors, freelancers, self-employed individuals, attorneys (even if they're corporations), and others performing services for your business who are not your employees. Federal executive agencies must also report payments to vendors for services, including payments to corporations, per Revenue Ruling 2003-66.

Corporate Exemption (Mostly): Generally, you don't need to file Form 1099-NEC for payments made to corporations. However, there's an important exception: payments to attorneys and law firms must be reported regardless of their business structure. Legal services are specifically carved out from the corporate exemption under section 6041A(a)(1).

What's Reportable in Box 1: Report fees, commissions, prizes and awards for services, professional fees (to accountants, architects, contractors, engineers), directors' fees, payments for parts or materials included with services, oil and gas payments for working interests, and taxable fringe benefits provided to nonemployees. Include expenses incurred for the use of an entertainment facility that you treat as compensation to a nonemployee.

Backup Withholding: Nonemployee compensation reportable on Form 1099-NEC is subject to backup withholding if a payee has not provided a Taxpayer Identification Number to the payer. The backup withholding rate is 24 percent. Report these withheld amounts in Box 4 of Form 1099-NEC, and file the form regardless of whether the payment amount reaches $600.

2019 Announcement for 2020 Implementation: The IRS officially announced Form 1099-NEC's return in July 2019, giving businesses and tax professionals several months to prepare for the change effective January 1, 2020.

Source: IRS.gov

Step-by-Step (High Level)

Step 1: Gather Information

Throughout the year, collect each contractor's name, address, and Taxpayer Identification Number (TIN)—usually their Social Security Number for individuals or Employer Identification Number for businesses. The best practice is to have contractors complete IRS Form W-9, Request for Taxpayer Identification Number and Certification, before you pay them for the first time. Keep accurate records of all payments made to each contractor.

Step 2: Determine Who Qualifies

At year-end, identify everyone who received $600 or more in nonemployee compensation during the calendar year. Check that they weren't employees (who would receive W-2s instead) and that their payments fall under reportable services rather than merchandise or excluded categories.

Step 3: Obtain the Correct Form

Download the official Form 1099-NEC from IRS.gov or order copies from the IRS. If you're filing electronically, you can use the IRS Information Reporting Intake System (IRIS) or other IRS-approved e-filing systems. The form has multiple copies: Copy A goes to the IRS, Copy 1 goes to your state tax department (if required), Copy B goes to the recipient for their tax return, and Copy 2 goes to the recipient for their records. Copy C is for your files.

Step 4: Fill Out the Form

Enter your business information (name, address, TIN) in the payer section using hyphens in the proper format. Enter the contractor's information in the recipient section. In Box 1, enter the total nonemployee compensation paid during the year. If you withheld any federal income tax for backup withholding, report it in Box 4. If you made direct sales of $5,000 or more of consumer products for resale, check Box 2.

Step 5: File by January 31

Send Copy A to the IRS and provide copies to the recipient by January 31. Unlike Form 1099-MISC (which has different deadlines for paper versus electronic filing), Form 1099-NEC must be filed by January 31 whether you file on paper or electronically. Keep Copy C for your records for at least three years.

Step 6: Keep Records

Maintain copies of all filed forms along with supporting documentation (invoices, payment records, W-9 forms) for your business records. These documents are essential if you're ever audited or need to issue corrections.

Source: IRS.gov

Common Mistakes and How to Avoid Them

Mistake #1: Missing or Incorrect TINs

Using an incorrect Social Security Number or Employer Identification Number is one of the most common errors. This can result in IRS notices and penalties. Solution: Always collect Form W-9 from contractors before making payments. The IRS offers a TIN Matching program to help verify taxpayer identification numbers. If a contractor refuses to provide their TIN, you must begin backup withholding at 24%.

Mistake #2: Confusing 1099-NEC with 1099-MISC

Some businesses continue reporting nonemployee compensation on 1099-MISC Box 7, which was the old method before 2020. Solution: Remember that starting with 2020 payments, nonemployee compensation goes on Form 1099-NEC, not 1099-MISC. Form 1099-MISC is now reserved for other types of payments like rents, royalties, and prizes.

Mistake #3: Not Understanding Reporting Requirements for Small Payments

While you're not required to file Form 1099-NEC for payments under $600, the IRS expects all income to be reported by recipients regardless of amount. Solution: Understand that the $600 threshold is your filing requirement as a payer, but contractors must report all income on their tax returns.

Mistake #4: Reporting Reimbursed Expenses

Including certain reimbursed expenses in the compensation amount can inflate the reportable income. Solution: Only report actual compensation for services. Refer to IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses, and the General Instructions for Forms W-2 and W-3 for guidance on accountable versus nonaccountable plans.

Mistake #5: Missing the January 31 Deadline

Unlike other information returns, Form 1099-NEC has the same January 31 deadline for both paper and electronic filers, with limited extension options. Solution: Start your 1099 process in early January. Request W-9 forms from new contractors immediately. Use electronic filing to streamline the process and receive faster confirmation of receipt through the IRS IRIS system.

Mistake #6: Checking the VOID Box for Corrections

When correcting an error, some filers mistakenly check the VOID box instead of the CORRECTED box. The IRS scanning equipment ignores voided forms, so your correction never gets processed. Solution: Use the CORRECTED checkbox and clearly mark which information has changed. Send the corrected form to both the IRS and the recipient.

Mistake #7: Failing to Report Corporate Attorneys

Many businesses assume the corporate exemption applies to attorney payments, but it doesn't. The exemption from reporting payments made to corporations does not apply to payments for legal services. Solution: Always file Form 1099-NEC for attorney payments of $600 or more, regardless of whether the law firm is incorporated.

Source: IRS.gov

What Happens After You File

For Your Business

After you file Form 1099-NEC with the IRS, the agency uses the information to match against tax returns filed by the contractors you paid. The IRS's computers cross-reference the income you reported paying against what contractors report receiving. Keep your copy of all filed forms for at least three years in case of questions or audits.

For the Contractor

Contractors who receive Form 1099-NEC must report the income on their personal tax returns. Self-employed individuals typically report this income on Schedule C (Profit or Loss from Business) attached to Form 1040. The income reported on Form 1099-NEC is subject to self-employment tax, which covers Social Security and Medicare obligations.

IRS Matching and Notices

The IRS uses computer matching systems to compare Forms 1099-NEC with individual tax returns. If there's a discrepancy between what you reported paying and what the contractor reported receiving, both parties may receive IRS notices requesting clarification. This is why accuracy is critical.

Penalties for Non-Compliance

According to IRS penalty provisions, failure to file correct information returns results in penalties that vary based on when you file the correct information return. The penalty structure accounts for returns filed correctly within 30 days of the due date, returns filed after 30 days but by August 1, and returns filed after August 1 or not filed at all. Intentional disregard of filing requirements carries higher penalties. Additionally, failure to furnish correct payee statements results in separate penalties.

State Filing Requirements

Many states require you to file Form 1099-NEC with their tax agencies as well. Check your state's specific requirements, as deadlines and procedures may differ from federal requirements. Some states participate in the Combined Federal/State Filing program, which allows you to meet both federal and state obligations with one filing.

Electronic Filing Requirements and Benefits

Beginning with information returns required to be filed on or after January 1, 2024, businesses filing 10 or more information returns (calculated by aggregating all information returns) must file electronically. If you file electronically through the IRS Information Reporting Intake System (IRIS) or other approved systems, you'll receive acknowledgment of receipt, making it easier to prove timely filing.

Source: IRS.gov

FAQs

Q1: Do I need to file Form 1099-NEC for payments made via credit card or payment settlement entities?

No, according to IRS instructions, payments made with a credit card or payment card and certain other types of payments, including third-party network transactions, must be reported on Form 1099-K by the payment settlement entity under section 6050W and are not subject to reporting on Form 1099-NEC. If your customers or clients pay you directly by credit, debit, or gift card, you'll receive a Form 1099-K from your payment processor or payment settlement entity.

Q2: What's the difference between an employee and an independent contractor for Form 1099-NEC purposes?

Employees receive W-2 forms and have taxes withheld from their paychecks. Independent contractors are responsible for paying their own taxes and receive Form 1099-NEC for compensation of $600 or more. The determination involves factors regarding behavioral control, financial control, and the relationship between the parties. For detailed guidance on worker classification, consult IRS Publication 15-A, Employer's Supplemental Tax Guide.

Q3: How do I handle payments that include both services and reimbursed expenses?

The treatment depends on whether reimbursements are made under an accountable or nonaccountable plan. For detailed guidance on employee business expense reimbursements and how they differ from payments to independent contractors, refer to IRS Publication 463 and the General Instructions for Forms W-2 and W-3. Generally, only actual compensation for services should be reported on Form 1099-NEC.

Q4: What happens if a contractor refuses to provide their Taxpayer Identification Number?

If a contractor refuses to provide their Taxpayer Identification Number or complete Form W-9, you are required to begin backup withholding. According to IRS guidance, backup withholding is a 24 percent tax taken from payments to ensure the IRS receives the tax due on this income. You must file Form 1099-NEC reporting the payments and the withheld amount in Box 4, and remit the withheld tax to the IRS using Form 945, Annual Return of Withheld Federal Income Tax.

Q5: I forgot to file Form 1099-NEC by January 31. What should I do?

File immediately. The penalty structure is designed so that earlier filing after the due date results in lower penalties. For paper filing, mail the forms to the appropriate IRS address. For electronic filing, use the IRS's electronic filing system such as IRIS. If you need an extension, you must meet specific criteria listed on Form 8809 to qualify for a 30-day extension.

Q6: Do I need to file Form 1099-NEC for payments to my landlord for office rent?

No, rental payments are reported on Form 1099-MISC (Box 1), not Form 1099-NEC. Form 1099-NEC is specifically for nonemployee compensation—payments made in exchange for services performed by non-employees. Rents, royalties, and other types of payments belong on Form 1099-MISC or other appropriate information returns.

Q7: Can I file one Form 1099-NEC for multiple contractors, or do I need a separate form for each person?

You must file a separate Form 1099-NEC for each contractor you paid $600 or more during the year. Each form reports payments to a single recipient. The IRS provides electronic filing options through IRIS and other approved systems to help streamline the process when you have multiple recipients to report.

Source: IRS.gov