Get to know the authorAs a business owner or self-employed expat, you’re likely at least vaguely familiar with the various tax forms you’re required to file with the IRS on an annual basis. If your business pays independent contractors for their services, one of the most important forms you’ll need to evaluate as part of your filing requirements is Form 1099-NEC. This IRS form is used to report payments made to non-employees, such as freelancers and contractors, which helps the IRS make sure income is reported and taxed appropriately, especially since nonemployees are responsible for self-reporting their income.
But how exactly do you fill out Form 1099-NEC, when should it be filed, and who do you send it to? Below, we’ll break it down for you step by step, so you can stay compliant and avoid possible penalties.
What is Form 1099-NEC?
Form 1099-NEC (Nonemployee Compensation) is the IRS form that businesses use to report payments made to independent contractors. It specifically applies to payments of $600 or more to a single contractor during a tax year. If you hired a freelancer or contractor to provide services and paid them this amount or more, you’re required to file Form 1099-NEC.
This form is critical for tax compliance because it reports income paid outside of regular payroll. Although it’s the contractor’s responsibility to report and pay taxes on this income, your business is required to file Form 1099-NEC with the IRS and provide a copy to the contractor.
Who Needs to File Form 1099-NEC?
You must file Form 1099-NEC if:
- You paid an independent contractor $600 or more for services during the tax year.
- The contractor is not a payrolled employee (i.e., they handle their own tax withholding).
- You made payments to an individual, partnership, or LLC— not a corporation (with some exceptions, including payments to attorneys).
How to Fill Out Form 1099-NEC: A Step-by-Step Guide
Filling out Form 1099-NEC is simpler than it may seem. Here’s a breakdown of each section:
Step 1. Payer’s Information
Start by entering your business’s details:
- Name and address: This is your company’s registered name and mailing address.
- Taxpayer Identification Number (TIN): Use your Employer Identification Number (EIN) or Social Security Number (SSN).
Step 2. Recipient’s Information
This section is for your contractor’s information:
- Contractor’s name and address: Ensure it matches what’s on file with the IRS.
- Contractor’s TIN: Enter their EIN or SSN. You should have this information from the Form W-9 they filled out when initially contracted.
Step 3. Box 1 – Nonemployee Compensation
Here, you’ll report the total amount you paid the contractor over the course of the tax year. Make sure to include only payments for services, not any reimbursed expenses or personal payments.
Step 4. Box 4 – Federal Income Tax Withheld
If you withheld federal income tax (which is rare for contractors), enter the amount here. However, most independent contractors handle their own tax withholding, so this box is typically left blank.
Step 5. Boxes 5-7 – State Information
If applicable, these boxes are for reporting state income and state tax withheld. Only fill these out if required by your state tax agency.
When to File Form 1099-NEC
The deadlines for filing Form 1099-NEC are strict. The IRS requires that you:
- Provide Copy B to the contractor by January 31.
- Submit Copy A to the IRS by January 31, either by mail or electronically.
If you file late, the IRS may impose penalties ranging from $50 to $580 per form, depending on how overdue your filing is. It’s important to meet the deadlines to avoid penalties.
Filing Form 1099-NEC: Paper vs. Electronic
You can file Form 1099-NEC on paper, but if you’re filing 250 or more forms, the IRS requires electronic submission. To file electronically, you’ll need to use the IRS FIRE system. Filing electronically is often faster and ensures you meet deadlines with ease.
Common Mistakes to Avoid
Here are some common mistakes that business owners and freelancers make when filing Form 1099-NEC:
- Not filing at all: If you paid a contractor $600 or more, you must file. Failing to do so can result in large penalties.
- Incorrect information: Errors in the contractor’s name, address, or TIN can lead to rejection by the IRS.
- Missing the deadline: Always submit your forms by January 31 to avoid penalties.
Form 1099-NEC and Expats: What to Know
If you’re a U.S. expat running a business abroad, you still have to file Form 1099-NEC for any contractors you hire, even if you’re not based in the U.S. This form applies to U.S. citizens regardless of where they reside, so don’t overlook it if you’re managing your business from abroad.
Resources:
1. IRS Website
