I-9, W-4, 1099, W-2… oh my! If figuring out tax form lingo feels like playing a chaotic game of Battleship, where all the ships are chess pieces and for some reason you’re rolling a pair of dice like backgammon…
...don’t give up hope. Know Your Numbers Accounting is here to clarify the rules and help you sort things out when it comes to the IRS 1099-NEC form.
Small business owners are often in the position of having to determine employment status on their own, as well as distribute the correct forms during tax season. It doesn’t help that the IRS has changed things in 2021!
If you need a quick run-down or brush-up on what 1099 forms mean, who should receive them, and how to file correctly, we’ve got you covered like a chivalrous accounting umbrella on a rainy day.
What is the IRS 1099-NEC form?
There are quite a few different types of 1099 forms, but for the sake of small businesses paying independent contractors, there’s been a change for the 2020 tax season in regards to which one you need to fill out and distribute.
Non-employee compensation was previously recorded in the 1099-MISC form. Now, however, the IRS has created a new form: the 1099-NEC.
Okay, that’s not entirely true. Like permed hair and mom jeans, the 1099-NEC form was last seen in the 1980’s, but it’s been in hibernation since then.
That doesn’t mean you won’t use the 1099-MISC. You should still use the 1099-MISC to report transactions for things like royalties, prizes, and legal services. But you should not use it for paying your attorney… it’s confusing. For a complete list of rules, visit the IRS website.
The biggest thing to know is that as of 2020, all independent contractor payments are now reported through the 1099-NEC form.
Who should receive the IRS 1099-NEC form?
Sorry, college sports fans. NEC does not stand for Northeastern Conference. NEC stands for Non-Employee Compensation… somehow. And the answer is in the name.
Basically, anyone who is not an employee of your business but earned more than $600 in the previous calendar year should receive an IRS 1099-NEC form.
Who exactly is classified as a non-employee?
Determining correctly who is and is not an employee of your business hinges on a few key considerations. Correct worker classification is important, especially with new laws such as California’s AB-5 drawing stricter lines (and getting challenged by courts and voters, yikes).
Misclassifying can put you on the hook for unpaid employment taxes. For employees, you generally have to withhold and pay income, social security, and Medicare taxes on their wages. This is not true for independent contractors. So if you mess up, these extra payments can come back and bite you, not to mention being a huge headache.
So how do you ensure that you’re classifying correctly?
The general rule from the IRS is that: “an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result.”
Basically, if you ask someone to do something by a deadline, but can’t tell them how to go about accomplishing it, they’re considered an independent contractor. Like asking your kid to do the chores, you just want them to get done.
How do I submit the IRS 1099-NEC form?
You can find the 1099-NEC form online. From there, fill out each copy and distribute them like so:
- Copy A goes to the IRS.
- Copy 1 goes to your state tax department.
- Copy B and Copy 2 go to the independent contractor.
- Copy C is kept for your own personal business records.
The 1099-NEC form can be submitted through the mail, or submitted electronically. E-Filing can be done through the IRS website.
When is the IRS 1099 form due?
As a business owner, you are required to get your completed 1099-NEC forms to your payees by January 31st, in order to give them adequate time to file their taxes with the correct compensation information.
Make sure your non-employees have plenty of time to file by getting them the info early. After all, you want them to want to work with you again, right?
As a business, you must file your 1099-NEC forms with the IRS by February 28th, or March 31st if filing electronically, like QuickBooks Online. There’s plenty of different tax filing software out there, not to mention qualified accountants who can help you figure out any new IRS rules at the end of the year… since they keep changing.
Yeah, we don’t love it any more than you do.
Also note that there is no longer an automatic 30-day extension to file, unless your business has had certain hardships. If you meet these conditions in the eyes of the IRS, you can qualify for a deadline extension.
What if I don’t file my IRS 1099 forms correctly?
Not every mistake is the end of the world, but like most things having to do with your business finances, it’s always best to get it right the first time.
Like previous years, 1099 forms can be corrected by filling out a new paper form, marking the “corrected” box at the top of the form, and resubmitting it. Of course, the process is a bit more complicated than that. For a more thorough overview, click here.
What if I’m still confused?
You really don’t want to misclassify workers, so for correct determinations of who should and shouldn’t be considered an employee, talking to a lawyer can be a great first step.
And if you need help figuring out your 1099-NEC forms or 1099-MISC forms, you can always talk to the speedy, accurate team at Know Your Numbers Accounting for help.
Do you think that splitting up the 1099-MISC and 1099-NEC forms will help keep things straight, or is it just more paperwork? Let us know below.