If you use independent contractors, you will need to complete year-end Form 1099-NEC for each of them at tax time. The Ascent shows you how to complete and submit IRS Form 1099-NEC.
Although it’s tempting to try, you probably can’t handle all aspects of running your business internally. Just because you can make the best pineapple burgers and pancake buns in the Midwest doesn’t mean you can build a great website or keep up with day-to-day accounting.
These tasks need to be done, however, and while your business is growing, you may not have room in the budget for a full-time employee, so you can hire an independent contractor. At the end of the year, you will need to complete a Form 1099-NEC to send to these contractors and the IRS.
Read on to learn more about the difference between a contractor and an employee, how to complete the form, and where to send it when completed.
Overview: What is a Form 1099-NEC?
Form 1099-NEC is the independent contractor tax form. Use it to report to your contractors and the IRS how much they were paid during the tax year. You only need to file 1099 forms for contractors who have earned more than $600.
Form 1099-NEC was reborn in 2020 (it was originally discontinued in 1982) for reporting payments made to individuals. Prior to 2020, these payments were reported on the 1099-NEC.
Who is responsible for preparing a 1099-NEC?
The payer is responsible for completing the 1099 tax form and sending it to the IRS and the contractor. If your business hires contractors to perform tasks, you will need to complete the form at the end of the tax year.
If you are paid as a contractor by one or more of your clients, you will receive the 1099-NEC, but you do not need to send it to the IRS. However, you must report the income on your small business taxes.
If you do not receive a Form 1099 from a client, the income must still have been recognized as income when earned.
How to complete a 1099 form
Here are the steps to complete and submit Form 1099-NEC.
Step 1: Determine who is an entrepreneur
The first step is to determine which of the people you work with are contractors and which are employees. This is equivalent to a tax form 1099 versus W2 ruling, since independent contractors receive 1099s and employees receive W-2s.
Independent contractors generally work for a company but exist separately from it. They prepare their own financial statements, pay their own FICA taxes, set their own work hours, and work on specific projects. Employees, on the other hand, are fully integrated into a company’s operations.
It can be tempting to think of employees as contractors to avoid paying the employer’s share of FICA taxes. The IRS is aware of this temptation and closely monitors contractor payments. This will be one of the first things the IRS looks at during an audit, and you could be liable for thousands in back payments and penalties if you break the rule here.
If you are unsure, complete the IRS Form SS-8. In this document, you describe the employment relationship and the IRS will determine whether to classify the person as a contractor or an employee. Returning the form can take up to six months, so it is best used in situations where there will be a long-term employment relationship.
The best way to avoid stressful last-minute decisions is to figure out how to classify new people when they’re hired. Send one IRS Form W-9 people who will be independent contractors. It asks for the information you need for 1099.
Step 2: Order Forms
You will need to order IRS Form 1099 and then print out the information for them. You can either order the forms from the IRS or from your tax software, which will also be useful for filling out the forms.
Step 3: Complete the forms
We will go over the general 1099 requirements here. For more unique cases, see the IRS Instructions 1099-NEC.
Let’s start with the information about the W-9.
The W-9 is where you will find the contractor’s legal name, address, entity type, and EIN. If they are registered as an S corporation or C corporation, no Form 1099 is required. Enter this information into your accounting software and you can export it to 1099.
On the 1099-NEC.
You should receive four versions of the above form to print for each contractor. One is for the IRS, two are for the contractor (one for their case and one they may need to submit to their state government), and one for your case. Each version is completed with the same information. The IRS version is printed in red.
Start with the income amount in Box 1. Remember that you only need to complete the form if you paid the contractor more than $600 during the year. Check box 2 if you purchased more than $5,000 of consumer products (eg, t-shirts, cell phone cases, books, etc.) for resale from this contractor. Be sure to report the sales amount on your business tax return.
Withholding tax, reported in box 4, is only required in rare situations, such as for migrant agricultural workers who do not have a tax identification number (TIN). See the instructions above if you think you need to withhold taxes.
Finally, complete Form 1096which is a summary of all 1099s. Your tax or accounting software should generate this form automatically.
Step 4: submit the forms
Forms can be submitted electronically or by mail. To file Copy A electronically, first submit Form 4419 to obtain a Transmitter Check Code (TCC). The TCC can then be used to create an account with the IRS Filing Information Returns Electronically (FIRE).
The mailing address for copy A with the summary form 1096 varies by state.
Send the recipient copies of the form to the contractors for their report.
Step 5: complete the forms
Scan the 1096 along with all 1099s and save the electronic file for future reference. It is recommended to keep the registered form for three to five years. If you receive a 1099 from your customers, this should also be kept for three to five years.
When are 1099s due?
IRS 1099 rules state that 1099 forms must be filed with the IRS and mailed to contractors by January 31. Your entrepreneurs need time to process their 1099 forms to file their own business tax returns.
If you are approaching the deadline and cannot meet it, you can request a extension from the IRS directly. You won’t get much extra time, probably only 30 days, and the extension will be denied if you file it after the due date.
If you don’t file on time, you will be fined per return and the penalty increases with each month you don’t file.
You will also need to request an extension for the recipient’s copy. Send a letter to the IRS at the following address:
Internal Revenue Service
Attention: Extension Coordinator
240 Murall Drive, Mail Stop 4360
Kearneysville, West Virginia 25430
According to the IRS general instructionsthe following information should be included in the letter, “(a) payer’s name, (b) payer’s TIN, (c) payer’s address, (d) statement type, (e) statement that the request for extension is intended to provide statements to the recipients, (f) the reason for the delay, and (g) the signature of the payor or authorized agent.
Make your 1099s easily
Completing and submitting 1099 forms is an important part of the business tax cycle – the IRS and your contractors will not be happy with late or inaccurate information. If you only have a few contractors, it’s quite easy to fill out the forms manually.
If you use a lot of contractors, just keep your books up to date throughout the year and let your software do the work in January.