More than 15 million people in the U.S. are independent contractors or freelancers. Though these individuals are not employees of the company they work with, they make substantial impacts every day. In turn, they desire to get well compensated.
Like being an employee of a company, independent contractors are held responsible for certain tax protocols as determined by the Internal Revenue Service (IRS). The companies they work with are often requested to file a 1099 NEC on their behalf.
Continue to read to learn more about what a 1099 NEC is and who needs to file one.
1099 NEC Form Explained
Simply think of a 1099 NEC as a specific tax form dedicated to independent contractors, self-employers, and freelancers. This form was designed to report taxes associated with all nonemployee compensation. This includes short-term projects or longer contractor relationships.
The fillable form 1099-NEC, which was previously used decades ago, was reintroduced by the IRS in the 2020 tax year.
Who Needs A 1099 NEC
Before the 2020 tax year, companies that hired freelancers or independent contractors reported taxes through a form called 1099 MISC. The 1099 MISC not only included independent contractor taxes, but taxes on rental properties, awards, and additional payments.
To separate nonemployee compensation from miscellaneous payments, the IRS redefined the 1099 MISC form and brought back the 1099 NEC form. In turn, payments that are not defined as “nonemployee compensation” are required to be reported on a 1099 MISC form.
There is an exception. If a contractor or freelancer is a C or S corporation, a 1099 NEC form does not have to be filled out. There is an additional protocol in place for these classifications. Contractors who are a C or S corporation can review their W-9 form to learn more.
To exemplify, if a company hires a contractor to be a freelance writer, the writer or company will need to file a 1099 NEC. The writer is a nonemployee but is being paid to create content. In most cases, it is the obligation of the company that hired the independent contractor or freelancer to file the 1099 NEC form on their behalf.
On the other hand, if an individual decides to make a career out of fishing and sells more than $600 of fish or seafood, he or she will need to report the payments on a 1099 MISC.
Both forms are required to be filled out respectively if one receives payments of $600 or more per tax year.
Prepare a 1099 NEC Today
Tax forms are an inevitable part of operating a business. Filing a 1099 NEC does not have to be complicated. Fortunately, there are tax form generators that can make the process more straightforward.
A 1099 NEC form allows you to follow all legal tax requirements while compensating independent contractors and freelancers well. With the differentiation of form 1099 NEC and 1099 MISC, it is even more clear how payments must be reported.
You definitely need to learn more about form 1099 NEC and how to file one out accurately.