Running a business usually involves making tons of payments each day, week, or month. Apart from recurrent expenses, inventory purchases, and wages, most modern businesses also make a diverse range of payments to independent contractors, handymen, and freelancers for services provided.

These payments affect your bottom line, which is why the IRS (Internal Revenue Service) demands that businesses document these payments. Before 2021, this used to be done using the form 1099-MISC, which has since been replaced by the 1099-NEC Form.

But if you’re like most other business owners, you probably have various questions about the new form, if you should use form 1099-NEC, why, and how.

Read for answers to these burning questions as well as when your business needs to issue a 1099-NEC form.

What’s the 1099-NEC Form?

You might not have guessed from the name, but the “NEC” in 1099-NEC represents non-employee compensation.

The 1099-NEC is the latest form that businesses should use when reporting compensation or payments to non-staff persons or service providers like independent contractors and freelancers.

According to the IRS, these payments may include professional fees, service fees, commissions, and the cost of parts associated with the services rendered by non-employees.

What was previously filed in the 1099-MISC form’s box 10 is what goes to the 1099-NEC form. It also differs greatly from the W-2 forms, which are issued to report employee wages, expenses like staff training, and withheld taxes.

Who Needs To File The Form?

If you run a business that occasionally works with independent contractors filing form 1099-NEC might be a legal requirement from you. This is especially true for payments totaling 600 dollars or above in a single year.

Here are some guidelines to help you determine if you should file the form.

  • You paid a non-employee or independent contracts for services rendered to your business
  • These payments were equal to or more than $600
  • The payments were made to individuals, estates, and partnerships

Who is a 1099-NEC Form Issued To?

As already mentioned, a 1099-NEC form is issued to independent contractors you considered hiring or workers who are not on the business’s payroll but are nonetheless paid for their services.

Once you get and fill out the 1099-NEC, you’ll need to submit a copy to the IRS and mail another copy to the payee. This means that if worked with several independent contractors, each of your payees should have a copy of the filed NEC 1099 form.

The process can be quite hectic to perform manually, which is why the IRS requires businesses to submit 1099-NEC returns electronically if they exceed 250. A wide range of software and online tools are also available to make the task simpler.

Where Do You Get Form 1099-NEC?

You might have discovered that you need to file 1099-NEC at this point. But where exactly can you get it? Here are several options to consider:

1. Creating a 1099-NEC Form Online: 

Especially for up-and-coming startups, this is undoubtedly among the best and most convenient options. The internet allows you to prepare a 1099 NEC form instantly without the costly errors most people make.

As long as you use a reliable tool, you also get to save time and money in the process, plus your sensitive data will be secured and safe.

2. Tax prep software:

Well, you can use your favorite tax preparation software or accounting tool to get form 1099-NEC. However, these will cost you a significant amount of money; plus you’ll also need some proficiency in operating the software.

3. Accountants: 

Many people also approach CPAs and accountants when they need these forms. However, this often means incurring extra costs in consultation and professional fees.

4. The IRS Website: 

While 1099-NEC forms are available on the IRS website, traffic to the site is, more often than not, jammed. Downloading the form is possible, but the copy is printed using a special type of red ink that might bring problems when scanning the filled form back.

How It Differs From Form 1099-MISC

As earlier stated, the 1099-NEC came to replace the age-old 1099-MISC form. But the major difference is that while reporting nonemployee compensation on Form 1099-NEC to the IRS, you can now include fees for parts and materials, commissions, awards, prizes, referral fees, and other costs incurred while compensating services rendered by non-payroll parties.

The form may also be used to report other payments like insurance, rents, or healthcare payments made to nonemployees by the business for one reason or the other.

When Exactly Do Businesses Need To Issue Form 1099-NEC?

Like most other elements of taxation, form 1099-NEC is filed annually. Virtually, businesses are required to issue 1099-NEC before the IRS submission deadline, which is 31st January each year.

If you’ve made several payments to independent contractors that amounted to or exceeded $600, then you should file form 1099-NEC with the IRS by January 31 next year, and mail a copy to each of the payees.

If Jan 31 falls on a weekend (Saturday or Sunday) or holiday, filing is considered due the next business day.

From this and the earlier pointers, it is safe to say that businesses need to issue 1099-NEC when:

  • They have payments to nonemployees exceeding $600
  • 31st January is fast-approaching
  • When planning or filing taxes
  • As soon as possible after the date of payment

How to File a 1099-NEC Form

You can either file your 1099-NEC forms on paper or electronically (if they exceed 250) using the FIRE (Filing Information Returns System) from the IRS. The filled forms should be sent via mail to the IRS as well as the payees.

You can also use a software company or online service that provides these services at a considerable fee.

Common Errors When Filing 1099-NEC

Like with most other aspects of taxation, businesses tend to make various mistakes when filing NEC 1099, some of them more often than others. A few of these that you should avoid include:

  • Filing the form past the due date
  • Using the form to report personal payments
  • Filing the wrong form
  • Forgetting to indicate the taxpayer id number
  • Entering incorrect information when filling the form

Filing a Corrected Form 1099-NEC

Thankfully, errors made when filing form 1099-NEC can always be corrected and the form filed afresh. This is usually done by filling and sending a form called 1096 alongside a corrected Copy A form to the relevant IRS processing center.

If your business operations involve working with independent contractors, you’re required to accurately report their payments to the taxman. Today, this is done using the NEC form 1099 in the US, and it affects numerous startups around the country.

Hopefully, this article answered some of the burning questions you might have had concerning taxes and payments made to nonemployee workers.