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IRS Form 1099-NEC
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The 1099-NEC is back
In 2020, the Internal Revenue Service (IRS) decided to reintroduce Form 1099-NEC. Are you a self-employed individual trying to understand what the form means and how to use it? Here's a complete guide to the inner workings of the 1099-NEC form.
Table of contents
Form 1099-NEC: what is it and why was it sent to you?...Read more
Why Was Form 1099-NEC Reinstated by IRS...Read more
Who gets a 1099 NEC?...Read more
What is not included in the Form 1099-NEC...Read more
What does Form 1099-NEC look like?...Read more
Understanding how Form 1099-NEC is filed...Read more
What is the 1099-NEC due date 2022?...Read more
Are there penalties for missing the deadline to file Form 1099-NEC?...Read more
How to file the 1099 NEC as an independent contractor...Read more
Calculating 1099 taxes...Read more
Form 1099-NEC: what is it and why was it sent to you?
If you're a freelancer, whoever has paid you for your services should record that payment for the year on a Form 1099-NEC and send it to you.
Why Was Form 1099-NEC Reinstated by IRS
Before the IRS Form 1099-NEC, business reported all payments to self-employed people and freelancers on Form 1099-MISC. In 2020, the IRS made the decision to reinstate the 1099-NEC for reporting payments to self-employed people and freelancers separately from miscellaneous expenses. Now the 1099NEC rules state that non-employee payments like rent payments and monetary prizes, must be reported on the 1099-MISC.
1099-NEC vs 1099-MISC?
Who gets a 1099 NEC?
You might be wondering, "what is NEC in the 1099-NEC?" If you work as a freelancer, sole proprietor, independent contractor or self-employed person, you're considered a nonemployee by the IRS, and you would receive a 1099-NEC form for your work.
You might also be wondering, "what is NEC work or what is nonemployee compensation?" Any work you perform for a company not done for hourly wages or for a salary is NEC work. Essentially, it’s not NEC work if you receive a W-2 tax form for it. The payment you receive is called nonemployee compensation.
Also, if you receive $10 or more in royalties any time during the year, you should receive a 1099-NEC form.
What is not included in the Form 1099-NEC
There are some restrictions that businesses have when it comes to the 1099-NEC. For example, businesses cannot report their employee wages or report business travel allowances for employees. These kinds of payments get reported on Form W-2.
What does Form 1099-NEC look like?
An understanding of Form 1099-NEC wouldn't be complete without knowing what the form looks like, the different sections and what gets reported where.
Luckily, Form 1099-NEC is relatively straightforward and short compared to many of the IRS' other forms.
Businesses report non-employee compensation on multiple copies of a 1099-NEC form. The copies then get distributed to various tax departments and non-employee recipients.
Once the business entity making payments has entered all the required information on the Form 1099-NEC, they need to send several different copies to the non-employee whose name is on the form and to others by January 31 of that year.
Businesses that report non-employee compensation payments on the 1099-NEC send different copies to different recipients.
- Copy 1 goes to the tax department of the state in which you are a registered taxpayer.
- Copy B is sent to you, the non-employee (freelancers, self-employed people and independent contractors).
- Copy 2 is also sent to non-employees.
- The business filling out the form keeps Copy C for its tax records.
Understanding how Form 1099-NEC is filed
When a hiring entity files a 1099-NEC, they fill out each box in the form, but it's good for you to know how to fill out a 1099 NEC, even if you're not the one filing it, and to look at a completed 1099-NEC example.
- Box 1 reports the payments made for services completed by self-employed individuals, freelancers, gig workers and contractors
- If the business that hires you sells you products totaling $5,000 or more for you to resell, an "X" is entered in the checkbox in box 2
- Box 3 remains blank since it is reserved for reporting later tax years
- If a business hires you and withholds any federal income tax, they will report that amount in box 4
- Boxes 5-7 are information for state income tax purposes
The full set of 1099-NEC instructions can be found on the IRS website.
What is the 1099-NEC due date 2022?
We all dread the word "deadline" in almost any context, especially when it comes to taxes. Fortunately, the deadlines surrounding this tax form don't apply to you, for the most part, though they do affect your overall annual tax filing deadline.
The business that hired you will send copies of the form both to you and the IRS by January 31 of the following year. If January 31 falls on a weekend or a holiday, the next business day becomes the new deadline.
Are there penalties for missing the deadline to file Form 1099-NEC?
For individuals filing income taxes, the IRS sometimes allows extensions to deadlines and payment plans to help people who have difficulty paying. But when it comes to 1099NEC rules, the IRS is not as lenient. For example, if a company is late in filing a 1099-NEC for payments made to you for work you did as a self-employed person or freelancer, the maximum fine they can receive from the IRS is $556,500 in a year.
If they fail to file the form, you also will not receive a copy, possibly causing you to receive a fine for missing the April 15 filing deadline.
How to file the 1099 NEC as an independent contractor
If you're an independent contractor and you have your own small business, you may hire people from time to time to assist you in your work. As the company owner, you'll need to fill out a 1099-NEC for each of them.
Remember, you only need to file a 1099-NEC for workers for whom you paid $600 or more for their work throughout the entire tax year. And, don't forget to file the correct copies with the correct entities, including the IRS, and send a copy to the person who receives the payment from you.
Calculating 1099 taxes
Unfortunately, the IRS' 1099-NEC instructions don't include any guidance to calculate the amount you will need to pay in 1099 taxes. This can be one of the more daunting aspects of taxes for self-employed individuals and freelance workers. Hiring a CPA who is well-versed in 1099-NEC instructions is far too expensive, but doing your taxes on your own takes valuable time and can be complicated.
FlyFin has created a 1099 Tax Calculator to do the work for you, so you can find out how much you need to pay in self-employment taxes. And, FlyFin's A.I.-powered tax app finds every possible tax deduction, so you don't leave a penny on the table at tax time. If you have a question about a deduction, swipe up to ask a CPA 24/7. The CPA team will also file your taxes for you at a fraction of the 1099-NEC accountant fees that you might be used to, with 100% accuracy and audit insurance at no extra cost. File your taxes as swiftly as you read this article, and never overpay or miss a deadline.
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