Step by Step 1099 NEC Instructions for Reporting Payments to Non-Employees

Looking for 1099 NEC Instructions? Consider this your one stop shop! We’ll cover everything you need to know about form 1099 NEC, including a short overview of what the form is for, and step by step instructions for how to fill it out, file it, and avoid any penalties. Ready? Let’s dive in!

This article is part of our guide on independent contractor taxes.

What is Form 1099 NEC?

If you’ve never heard of even needing 1099 NEC instructions, don’t worry – you’re not alone, as these requirements are pretty new. In 2020, the IRS brought back the form, which hadn’t been in use since the early 1980s! 

To help businesses who were becoming confused with different filing deadlines, the 1099 NEC form is now mandatory to fill in for any compensation to non-employees that amounts to $600 or more in any tax year. It is replacing one section within 1099 MISC, but you companies still need to submit that form as well.

What are the NEC Instructions for 2021/2022?

Even if you completed form 1099 NEC for the 2020 tax year, there are some changes to be aware of for 2021. It’s worth reading through the 1099 NEC instructions carefully to make sure that you understand what all the different fields are for, and ensure you’re filling it in correctly. 

First off, in the 2020 form, there was a FATCA check box, which has now been removed. This was for foreign account-related compliance, and does not feature on the 1099 NEC form for 2021 at all. You’ll also find two additional changes in boxes 1 and 2. In box 1, the IRS notes that under section 6050R, this shouldn’t be used for reporting any cash payments for the purchase of fish for resale purposes – a niche addition, but one which may be relevant to you! 

There is also the addition of box 2, which can be used to report any sales that add up to $5,000 or more of consumer products for resale.

Form 1099 NEC Instructions By Numbers

Let’s start from the top, and work our way down form 1099 NEC. At the top, you’ll need to provide your own information as the business. That’s your name, address and phone number, your taxpayer information number (either your Social Security Number or Employer Identification Number), and you’ll need the recipient’s taxpayer identification number, too. You should always make sure to get this during onboarding to make the process simpler when filing times comes around. You’ll also be asked for some basic information on the payee, such as their address, and account number.

The next parts of the form are labelled 1-7. Here’s where the IRS wants to understand how much you’ve paid your non-standard employee, and what taxes you’ve withheld.

Box 1: Enter how much you’ve paid the payee this year. Remember, you do not need to fill out this form at all if the full amount is less than $600. This includes all fees, commissions, prizes and awards, including oil and gas payments, expenses incurred for the use of an entertainment facility, and (yes, we’re back to fish again) any fish purchases that were paid in cash. $599? Ignore the form entirely. $601? Keep reading, kid.

Box 2: New addition klaxon for 2021! In box two, you’ll report any sales of $5,000 or more of consumer products which are for resale or deposit-commission. You might have reported this already on Form 1099-MISC. If you have, that’s fine – you don’t need to report it again here.

Box 3: How mysterious! The IRS has left this one blank “for future use”. Try to hold back from doodling in it.

Box 4: Have you withheld tax from the payments you made to the non-employee? If you don’t have the person’s correct TIN, you might need to do this to satisfy the IRS. All the more reason to get this information early, right?

Box 5: If you need to withhold taxes in your state, this is where you’ll enter the amount you’ve withheld. You can report payments for two states, which is why you’ll see two handy lines for reporting. However, it’s likely that these boxes won’t need to be filled in.

Box 6: If you’re using box 5, you will need to identify the state by it’s identification number, or much easier – the short abbreviation used for your state. Y’know – NJ for New Jersey, or MI for Michigan.

Box 7: The last box on the form is the state income box, and will be used for the amount of the state payment.

I’ve Filled Out Form 1099 NEC. What’s Next?

Your 1099 NEC instructions don’t stop there! Now that you’ve filled out the form, you have to make sure that you file it correctly, and that all the relevant parties get a copy. You have until January 31st to file the form with the IRS, and you can do this with a paper copy, or electronically. 

Remember – while you used to be able to use the postal system if you were filing less than 250 forms, the IRS is on its way to making e-filing mandatory, as part of the Taxpayer First act. In 2021 this is set to be 100 forms or less, and by the 2022 filing deadline, you can expect mandatory e-filing if you’re sending more than 10 forms. Much more efficient, much better for the environment, and this should save you on stamps, too. 

You will also need to make sure that the payee has a copy by the due date, so that they can also file it with the IRS before their own due date. Make sure to check if your state requires you to file separately with them (as of now, 33 states have announced their own state filing laws), and also make sure to keep a copy for your own records.It’s important to stay on top of your paperwork and processes for filing form 1099 NEC, because the penalties can add up fast if you have to incur late return fees. The cost will be variable, but usually falls somewhere between $50 – $270 for each late form, depending on whether the IRS considers you to be purposefully trying to evade the paperwork, or whether you’re just a bit behind your filing schedule. If you have hundreds of independent contractors, agencies, or other non-employee workers, the fees can keep stacking up, as the maximum in fines for every single year is $556,500. We’re sure you have something a lot more valuable to be spending that hard-earned cash on!

Written by
Stoke Talent

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