Understanding Form 1099-NEC for Small Businesses

Understanding Form 1099-NEC for Small Businesses

Understanding Form 1099-NEC for Small Businesses

The Internal Revenue Service (IRS) requires small business owners to file specific tax forms depending on their business details. If you pay independent contractors to complete work for your business, you might need to complete IRS form 1099-NEC, which stands for nonemployee compensation. Form 1099-NEC is an information return that allows businesses to report payments to nonemployee workers during the calendar year to the federal government.

Learn in this Nav article the purpose of small business Form 1099-NEC, whether you need to file it, and all about filing information returns electronically to make tax time easier.

What Is the Purpose of Form 1099-NEC?

You may need to file several 1099 forms with your business taxes, including Form 1099-NEC. Filing the 1099-NEC Form lets the IRS know that you have made payments throughout the year for services from nonemployees. You may need to fill out IRS Form 1099-NEC if you paid the following:

  • Independent contractors
  • Freelancers
  • Self-employed individuals 
  • Government agencies
  • Nonprofit organizations
  • Attorneys

You’ll file Form 1099-NEC when you pay for services from a business operating as a sole proprietor or LLC. Payments to corporations are treated differently on your tax return, and there are only a few instances where you’ll include them in this form.

Does Your Business Need to File Form 1099-NEC?

If your business pays nonemployees like freelancers or independent contractors, you’re considered a payer. You’ll have to file Form 1099-NEC if you have any workers you pay (called payees) $600 or more during the calendar year.

Your business must report $600 or higher payments:

  • To any nonemployee worker
  • For business services, including from government agencies, nonprofits, and attorney fees
  • Made to an individual, estate, or occasionally a corporation

In these cases, you’ll need to include Form 1099-NEC with the rest of your tax forms. 

On the other hand, you don’t need to file a 1099-NEC form if you made payments:

  • To most corporations, including S corporations and C corporations. Only a few specific payments to corporations count.
  • For storage, telephone, merchandise, freight, or similar expenses.
  • For rent to property managers or real estate agents.
  • To organizations that are tax exempt. 

1099-NEC vs. 1099-MISC

The 1099-NEC and the 1099-MISC forms used to be combined until 2020, and they still function similarly. Businesses are required to send both forms to the IRS (and a copy to any payee) for payments with a total amount that’s more than $600 for specific payments. 

The specific payments that are reported for each type of 1099 form are different. As mentioned, Form 1099-NEC is used for payments to nonemployees. Meanwhile, payments reported on Form 1099-MISC are any payments that aren’t subject to self-employment taxes. In other words, the 1099-MISC Form reports miscellaneous payments like rent, awards, legal settlements, and health care expenses that you wouldn’t pay self-employment taxes on. 

The filing deadline for 1099-MISC is a little later than 1099-NEC — by February 28 if you file on paper and March 31 if you file electronically. 

1099-NEC vs. W-2

Now let’s explore the difference between the 1099 vs. W-2 Forms. While the 1099-NEC reports any payments to nonemployees, the W-2 reports employee compensation. Anyone who is a full- or part-time employee will receive a Form W-2 that details wages, tips, and other compensation, as well as Social Security taxes paid, every year they are employed by your business.  

Preparing to File Form 1099-NEC

Tax preparation takes several steps, so it’s important to start early. To get ready to file Form 1099-NEC, collect the following information:

  • Your business’s details, like business name, business address, and taxpayer identification number (TIN).
  • Details for the payee (the person or entity you’re paying), like name, address, and taxpayer identification number (TIN), like their Social Security number, which you can obtain when they fill out a new Form W-9.
  • The total amount of compensation paid to the nonemployee.
  • Any taxes withheld for federal income tax or state income tax purposes.

The due date to file Form 1099-NEC for the previous tax year is January 31, and you must send a copy to any payee by this date as well. In addition to the 1099-NES, you also must file a Schedule C (Form 1040) to report business income or loss to the IRS, as well as any other tax forms that your business requires. It’s a good idea to consult with a tax professional, like a CPA, to make sure you know what to file. 

How to File

When you’re ready to start filing 1099 forms for small businesses, you have options. You can finish up this tax filing in one of two ways: electronically or using paper forms. E-file is available using the Information Returns Intake System (IRIS) Taxpayer Portal from the IRS. 

If you file Form 1099-NEC on paper, you’ll have to include Form 1096 along with it. You don’t need to bother including this form when you file electronically.

Provide Copies to Contractors 

One part of the filing requirements is sending out multiple copies of your tax forms. You’ll need to send copies of Form 1099-NEC by the filing deadline of January 31 of each year to:

  • Copy A: Send to the IRS
  • Copy 1: Send to your state’s tax department
  • Copy B and Copy 2: Send to contractor
  • Copy C: Keep this copy for your tax records

Recordkeeping Best Practices

Keeping your business’s records organized is essential for your business to run smoothly. Here are a few organizational tips for keeping your records in order and easy to access. First, understand how long you need to keep specific records for by reading this guide from Nav. There are recommendations for how long you need to keep certain records on hand. On a similar note, destroy expired records as advised. It’s a good idea to work with an NAID AAA Certified shredding company to ensure confidential and secure disposal of your records. 

Next, create a system for your recordkeeping. For paper files, create a smart folder system so you can easily locate what you’re looking for. Do the same for digital records. Also, make sure to keep multiple copies of your records, ideally one digital and one paper. Try to keep the paper copies in a safe location, like a fireproof safe, where they can’t easily be damaged. 

Finally, make sure that any employee who handles records is trained on exactly how to store them and manage files.

Additional Resources

Here are a few more resources to help you better understand Form 1099-NEC and prepare for the next tax season. 

Official IRS guidance

Tax software

Using tax software saves you time and can maximize your return as a small business owner. Nav has everything you need to find the right tax software for your business. Here are some of the top tax software options from our trusted partners:

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