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Everything You Need to Know About the 1099-NEC

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    The 1099-NEC is issued to people who have received nonemployee compensation from a business. This form was used by the Internal Revenue Service (IRS) in the past, but it was eliminated in 1982 and brought back in 2020.

    This short form only requires a few basic details about the payer and the payee, including their names, addresses, and tax identification numbers (ITN). The payer typically only needs to enter one number — the amount of compensation. They may also enter federal income tax withheld in the very rare situations where they withhold taxes from these payments. 

    This guide to the 1099-NEC explains who needs to issue this form and what to do if you receive this form. It also covers common pitfalls of this form for both issuers and recipients.

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    Who Needs to Issue Form 1099-NEC?

    Businesses who make payments to nonemployees should issue a 1099-NEC form if they meet all four of the following requirements. They don’t have to issue this form if even one of these conditions does not apply.

    Non-Employee Recipient

    The business must have made payments to a nonemployee. This may include payments for professional services such as accounting or legal services. It also includes compensation paid to freelancers or commissions paid to nonemployee salespeople.

    Services Received in the Course of Business or Trade

    The payments must have been made for services received in the course of a business or trade. You should not issue a 1099-NEC if you paid someone to do something for you personally. Paying someone to remodel your office or provide consultancy services is an example of services received in the course of business. Paying someone to remodel your home bathroom or provide you with therapy, in contrast, are personal payments that don’t require you to issue this form.

    Payments to Certain Entities

    The payments must have been made to an individual, a partnership, an estate, or a corporation. You should not issue a 1099-NEC for payments made to other entities, such as investments in a trust or donations to nonprofit organizations.

    Over the $600 Threshold

    You only have to issue a 1099-NEC if you made payments over the $600 threshold throughout the year. Paying someone a few hundred dollars does not require you to file this form.
    You need to issue 1099-NEC forms for all payments that meet the above four conditions. You can download the form from the IRS’s website and file it through the mail, or you can use the IRS’s Filing Information Returns Electronically (FIRE) system to file it electronically. You must file the form and send a copy to the recipient by January 31 of the year following the year in which the payments were made.
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    What You Need to Know If You Receive a 1099-NEC

    You should receive a 1099-NEC if you received over $600 in nonemployee compensation from a company. Freelancers, for example, often receive these forms from their clients, but as explained above, many professionals such as attorneys and accountants also receive 1099-NECs when they do a significant amount of work for a single company.  You must report the information from the form on your tax return. Here’s what you need to know about dealing with this form at tax time.

    Reporting as Income

    You must report the compensation noted on the 1099-NEC as income on your tax return. Individuals and estates typically note this income on a Schedule C (Profit or Loss From Business), but if they received the income for a farm, they report it on Schedule F (Profit or Loss From Farming). Partnerships and corporations should include this income on their 1065 or 1120 forms, respectively.

    Withholding Expenses

    People who receive a 1099-NEC are considered to be small business owners by the IRS. This means that you can deduct expenses from your income. You report all the expenses you incurred earning that income on the form noted above, and then you face tax on the remainder.

    Here is a basic example. Say that you worked as a freelance photographer for a real estate company, and the company issued you a 1099-NEC with $10,000 of income. You incurred $3,000 of expenses in traveling to sites, buying camera equipment, purchasing insurance for your cameras, and paying for a cellphone to talk to clients. Your profit comes out to $7,000, and you only face tax on that amount.

    Understanding Taxation

    The income reported on the form is self-employment income, meaning that you must pay self-employment tax. This tax includes your Social Security contributions and Medicare premiums, and as of 2021, the self-employment tax rate is 15.3%. Employees, in contrast, pay just half this amount, and their employers pay the other half.

    You also face income tax on your earnings. The income tax rate varies based on your total earnings and whether you itemize or claim a standard deduction.

    Make sure that you track your expenses throughout the year if you know that you will receive a 1099-NEC. Being able to accurately report your expenses helps ensure that you don’t face an unwieldy tax liability.
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    What to Avoid with the 1099-NEC

    The 1099-NEC can be confusing to both people who issue and who receive this form. Dealing with the form is relatively straightforward, but you should avoid the following common mistakes. 

    • Forgetting to issue the 1099-NEC. The 1099-NECs you issue help to support the business deductions you claim for paying contractors.
    • Filing 1099-NECs late. The penalty for issuing 31 days late is $110 per unissued form, and the penalty increases with time.
    • Not claiming expenses. You are allowed to deduct the expenses you incur while earning 1099-NEC income. If you don’t, your tax bill will be higher than necessary.
    • Not tracking expenses. Reconstructing your expenses as tax time is time-consuming and prone to errors. Make sure to track them as they occur.
    • Mailing the 1099-NEC to the IRS. People and businesses that report 1099-NEC income don’t need to include the form with their tax returns.

    Failure to meet the obligation to issue 1099-NEC forms can lead to penalties and tax debt. Not understanding how to deal with the form you receive can also lead to tax issues. Make sure that you understand the essentials of this form, regardless of whether you’re issuing or receiving nonemployee compensation.

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    Contact the Silver Tax Group with Questions About the 1099-NEC

    People who receive a 1099-NEC often end up with unexpected tax liabilities, especially if they accepted the income without being aware of the tax implications. Contact the Silver Tax Group today to speak to our experienced tax attorneys. We can help you deal with tax debt and any other issues you’re having with the IRS.

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