What is Form 1099-NEC: A Guide to the Newest Tax Document

What is Form 1099-NEC?

Form 1099-NEC is a tax form automatically sent to the Internal Revenue Service (IRS) by an employer any time they pay $600 or more in compensation to an individual, excluding certain payments such as salaries, pensions, and wages. The form documents the amount paid during the year and the taxpayer's name, address, and TIN.

Think of this form as a quarterly paycheck that reports your wage information: you should never see it unless you are paid over $600 by your employer. This form can help avoid having your taxes miscalculated or delayed due to unknowingly incorrect withholding amounts.

Who must File Form 1099-NEC?

All individuals who have nonemployee compensation must be reported. You do not have to receive any tax form from the person paying you as long as you meet one of the following conditions:

• You are a sole proprietor, are in business for yourself, and report your income on Schedule C.
• You are a partner in a partnership or limited liability company (LLC) or S corporation shareholder and report your income on Schedule E, Schedule K-1 (Form 1065), or Form the 1120S.
• You are an independent contractor who has filed the required federal self-employment tax returns.

Any of the above tax filing types must also report the following compensation:

• Payments in the course of your trade or business to a nonresident alien.
• Payments in the course of your trade or business made to foreign persons, if they are not effectively connected with a U.S. trade or business and their income is subject to 30% withholding (1042-S – Foreign Person's U.S. Source Income Subject to Withholding)
• Payments by tax-exempt organizations, except for payments shown on Form W-2; and gambling winnings (must be reported on Form W-2G).
• Payments from a business are paid directly by a foreign person, except for payments shown on Form W-2.
• Payments for certain services to members of the U.S. armed forces and their family members provided that you received more than $600 in gross receipts from these services and have a valid TIN.

Some common distributions for which you must file Form 1099-NEC are:

You must report any payments that are not related to the performance of your contract or agreement with your client. This includes court-ordered payments, such as alimony and child support, and payments that reimburse you for expenses or out-of-pocket costs.

To avoid penalties, you must report all payments that are not related to the performance of your contract or agreement with your client. This includes court-ordered payments such as child support or alimony and payments that reimburse you for expenses or costs that your client did not pay you directly. If payment is charged back to the client's account in error, include this on Form 1099-NEC as well.

The best way to determine whether a payment is reportable is by looking at the W-2 form box information. If a business pays nonemployee compensation, it will be reported in one of the following boxes:

Box 14 – Federal tax withheld (income tax withheld).

Box 15 – Medicare wages and tips.

Box 16 – Social Security wages and tips.

Box 17 – Social Security tax withheld.

Box 18 – Medicare tax withheld.

If no one has been issued a W-2, you have no way of knowing whether you are obligated to issue a Form 1099-NEC (and report the payment on it) until after the end of the year in which the payment was made. For transactions in which you cannot delay payment until the following year (such as advance payments), issuing a Form 1099-MISC is appropriate and necessary for reporting your income accurately to the IRS for that year's personal tax return filing deadline.

The IRS does not require that you report payments for unincorporated business entities (e.g., sole proprietorships, partnerships, LLCs) unless the entity is subject to tax under the net income method. However, the IRS requires you to make a good faith estimate of payments to the company, and these estimates are used to determine whether or not your reporting requirements are met. Payments for services performed for an unincorporated entity should be reported on Form 1099-MISC for the year the services were performed or Form 1042-S if the services were not performed.

Since payment information is included on both a 1099-MISC and a W-2 (or was paid to you through an employee's personal wages), it is recommended that you treat any three of these forms as one single document. Since the payment information will likely be reasonably consistent between a 1099-MISC and a W-2 form, combining them into one single form makes life easier when determining whether you need to file either of these forms.

If you expect a Form 1099-MISC to be issued to you in addition to your W-2, continue to file Form 1042-S (if required) until you receive a W-2 form. Only one tax return is required for each employer.

The IRS uses Form 1096 to match forms received from taxpayers with forms sent to the IRS by payers of nonemployee compensation. You must file one Form 1096 for each set of Forms W-2 and/or Forms 1099 that's filed. Form 1096 is not considered a substitute for either a W-2 or 1099. You should save your completed returns if they are needed in an audit.

Once you receive your form (s) W-2 and/or form (s)1099, you should ensure they are accurate. You must also ensure that your Form 1099 is in order with the W-2 forms. You should check the Forms W-2 to see if you are withholding taxes and if the amount withheld matches what was withheld on your business 1099.

If you receive a Form W-2 from your employer that lists wages, tips, or other compensation as not being included on Form(s) 1099, you must make sure that this information is correct. Some businesses use Forms W-2 to determine whether or not to issue 1099. This can cause a problem for you because you might have to pay more tax on your wages than you should have.