What you need to know when filling out the 1099-Nec tax form
The IRS recently resurrected and redesigned a tax form it stopped using years ago. This is the 1099-NEC tax form used to report non-employee compensation. This tax form replaced the 1099-MISC form, in use since 1983 to report compensation to freelancers and contract workers. This form is also used to report crop insurance proceeds, royalties, rents, and other forms of payments unrelated to independent contractors. You need to know everything about Form 1099-NEC and how to file it.
Overview of form 1099-NEC
This tax form is a new way to report non-employee compensation or self-employment income. The IRS introduced it to help clarify the different filing deadlines included in the 1099-MISC tax form. It started with the 2020 tax year. Businesses will need to use it if they have made any payments totaling at least $600 to non-employed individuals or businesses, such as independent contractors.
What you need to know about filling out form 1099-NEC
If you receive this tax form for services you provide as an independent contractor, therefore, you should expect to file your taxes a bit differently. It is different from filing a W-2 form as a taxpayer who receives regular employment income. You will receive the 1099-NEC tax form if you worked as an independent contractor or were self-employed during the previous year. This is the first thing you need to know before you start filling out this form.
Tips to help you fill out form 1099-NEC
Filling out this form, as opposed to the W-2, comes with certain benefits. For example, you can claim some deductions on your Schedule C. These deductions, however, must relate to business expenses that the IRS considers necessary and ordinary for your business activities.
An expense is necessary if it helps you complete your work. However, it does not have to be essential in order to be necessary. When it comes to an expense being ordinary, other self-employed individuals in your field should incur it as well.
The cost of a state-of-the-art computing system, for example, is a necessary and ordinary expense if you are a programmer. Hiring a limo to travel from one place to another, whether or not it is helpful, is not an ordinary expense by tax standards.
How to read and fill out the 1099-NEC tax form
This tax form comes with five key sections or parts. These are:
- State information
- Payer’s information
- Federal income tax withheld
- Non-employee compensation amount
- Recipient’s information
Both the recipient’s and payer’s information includes the taxpayer ID, address, and name. You will find the non-employee compensation in the first box. You need to fill in your total compensation for the previous tax year. Use box four, on the other hand, to report any withheld federal income tax. This, however, will not be the case if you received a backup withholding order. If your state requires you to pay income tax, you need to include the total payment amount to that individual and any state tax withheld in box five.
You also need to know that you can e-file this tax form with the IRS. Mailing the 1099-NEC tax form, however, depends on your state. If you are self-employed, you must pay Medicare and Social Security taxes as well.
Your 1099-NEC revenue is not subject to employment tax withholding. Therefore, you need to pay both of these taxes yourself. One of the most important things to remember is that you must file your Form 1099-NEC by Jan. 31 using either electronic or paper filing.