IRS Tax Form 1099-NEC – Instructions for Small Businesses & Contractors

Freelancers, small-business owners, and independent contractors received a new form in their mailbox in 2021: Form 1099-NEC.

Before 2021, they would have received Form 1099-MISC from any business that paid them $600 or more for their services during the calendar year.

So, what is Form 1099-NEC all about?

What is Form 1099-NEC?

Form 1099-NEC actually isn’t new, although it might be new to you. The last time the IRS required Form 1099-NEC was back in 1982.

Back then, besides the usually identifying information for the payer and recipient, it had just one box businesses had to fill out and send to anyone who received $600 or more in fees, commissions, and other nonemployee compensation during the previous tax year.

In 1983, the IRS moved all of the information it used to require on Form 1099-NEC to Form 1099-MISC, which businesses also use to report rent, royalties, and other income.

For more than 30 years, this streamlined system for information returns worked well. Then came the Protecting Americans from Tax Hikes Act of 2015, also known as the PATH Act, which changed the due dates for Form 1099-MISC.

1099 Filing Deadlines

Before the PATH Act, Form 1099-MISC was due by February 28 of each year, or March 31, if the business filed electronically.

But the PATH Act required business to navigate several different due dates for 1099-MISC:

January 31 to give a copy to all recipients
January 31 to the IRS if the form included an amount in Box 7 for nonemployee compensation (whether filed on paper or electronically)
February 28 to the IRS if filed on paper and there is no amount in Box 7
April 1 to the IRS if you e-file and there is no amount in Box 7

This series of filing deadlines made it difficult for the IRS to batch-process multiple 1099-MISC forms and resulted in many penalties for business owners. To solve the problem, the IRS brought back 1099-NEC.

Now, the IRS still requires businesses to report payments of rents, royalties, and other types of miscellaneous income on Form 1099-NEC. They also report nonemployee compensation on Form 1099-NEC, and businesses must provide it to recipients by January 31.

Understanding the IRS Form 1099-NEC Boxes

A 1099-NEC form is relatively simple compared to the catchall Form 1099-MISC.

Like other informational returns, it includes boxes for the names, addresses, and taxpayer identification numbers of the payer and payee. Then there are just seven boxes to complete.

Box 1. Nonemployee Compensation

Nonemployee compensation — such as payments to freelancers and independent contractors — goes in Box 1.

Suppose you receive a 1099-NEC for self-employment income. In that case, you need to include the amount shown in Box 1 in the revenues you report on Schedule C or Schedule F if your business is structured as a sole proprietorship or on Form 1065 if your business is a partnership.

Box 2. Direct Sales

A business puts a checkmark in Box 2 if it made direct sales totaling $5,000 or more of consumer products to the recipient for resale. Multi-level marketing companies selling products to their sellers at a wholesale price need to use this box.

If you receive Form 1099-NEC with this box checked, make sure you report the purchase price of these items on your tax return as an inventory expense.

Box 3.

The IRS reserved Box 3, and it’s not currently in use. You shouldn’t have anything in this box on the 2021 version of Form 1099-NEC.

Box 4. Federal Income Tax Withheld

Box 4 shows any backup federal income tax withheld from the recipient’s payments. A payer is required to backup withhold on certain payments if the recipient doesn’t provide their taxpayer identification number.

You can learn more about backup withholding rules on Form W-9.

Boxes 5 Through 7. State Income Tax Withheld Reporting

If the payer withheld any state income tax, they’d use box numbers 5 through 7 to report the amount withheld, the state for which they withheld tax, their state tax identification number, and the amount of applicable state income.

When Does Your Business Need a 1099-NEC?

Generally, your business has to file Form 1099-NEC only if you paid a business or individual (other than an employee) $600 or more during the prior year.

Likewise, if you received more than this amount from a client or customer in payment for your services, you should receive a 1099-NEC from them.

Even if you don’t receive a 1099, you’re still required to report that income on your tax return.

Sometimes clients forget to send them. Sometimes they pay you via a third-party payment processor or credit card. Those payments go on Form 1099-K instead of 1099-NEC.

Don’t worry too much about not receiving one. Just report the amount of business income you’ve tracked during the year using your online accounting software, and you’ll stay on the IRS’ good side.

If you do receive a 1099-NEC, look at the amount shown in Box 1 to see if it matches your financial records. The IRS gets a copy of it too.

So if your client accidentally reports that they paid you more money than you received, as far as the IRS is concerned, you made that income and owe income tax on it. You’ll want to reach out to the payer and ask them to correct the error.

Final Word

Depending on the types of payments you sent and received during the year, you may have to deal with both Form 1099-MISC and the new Form 1099-NEC.

If this is your first year in business or you’re new to dealing with informational returns, it’s worth hiring a tax professional or CPA to ensure you’re taking advantage of all of the tax deductions available to you and filing the right forms for your business.