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Introduction

Before 2020-21, you were probably familiar with the Form 1099-MISC to hire independent contractors and freelancers for your business. With the new Form 1099 NEC, you will have to report the payments of independent contractors and freelancers as non-employee compensation.

If you’re already getting ready for income tax 2021, you will need to pay close attention to the essential paperwork.  From now on, the non-employee payment information you usually report on Form 1099 MISC will be on 1099 NEC.

Let’s take a look at the variations, importance, miscellaneous use, and deadline for the Form 1099-NEC: 

What Exactly Is Form 1099-NEC?

In layman’s terms, the 1099-NEC form is a new way to report compensation of non-employees such as freelancers and independent contractors. It means the independent contractor or freelancer you have decided to hire for new marketing, programming, or sales project will need to get a 1099-NEC.

Now, don’t think of the Form 1099 NEC as a new form. In fact, the form has been around for a couple of decades. But in 2021, you will specifically use it to report the payments of your hired independent contractors and freelancers.

Usually, the IRS demands an extensive list of information on returns from small and medium-sized businesses. And part of the informational returns involves 1099 forms. These forms include the information of an individual who gets anything other than their salary or wages.

Taxation for Independent Contractors and Employees 

In terms of taxes, here are the core differences between employees and independent contractors:

  • Independent contractors

Your check will not have any withheld payroll taxes, which means you can pay as you go. In the 2021 tax period, you will get one or more 1099-NEC forms to highlight the total amount you managed to pay to the independent contractors (and freelancers).

  • Employees

Employers can take out several payroll taxes like state and federal taxes from employees’ paycheck. During tax season, employees will have to get a W-2 form their employer. It is more of an automatic withholding that allows employees to pay taxes for each fiscal year without manual processing or filing. 

Who Has to File 1099-NEC Form?

The title of the 1099-NEC form might come across as self-explanatory, but you will have to heed to certain elements. For instance, only use this form when you decide to pay your non-employees. You will have to use the 1099-NEC form if you pay $600 or more amount to one of your non-employees.

However, during filing of the Form 1099-NEC, there are other nuances that you will have to remember:

  • Make sure your non-employee does not fall under the umbrella of an employee.
  • Sometimes you may have to include corporate payments that can be for estate, partnership, or individual purposes.  
  • When you make a payment for a specific service, it will not count as a personal payment.

It is vital to understand that the payments you make can include fees, awards for rendered services, prizes, and commissions. In short, if you had to pay and file a 1099-MISC form for rendered services for your business, you will need to file a 1099-NEC form for the same service in 2021.

Of course, there are a few exceptions when it comes to non-employee payments. For instance, you cannot include employee payments such as paid wages to employees for business travel or allowances on the 1099-NEC form. Instead, you will need to use the W-2 form to report these payments. 

Other exceptions you will need to consider are:

  • Payments to C-corporations and S-corporations
  • Payments to organizations that already have tax-exemptions 
  • Payments for telegrams, fright, telephone, storage, or merchandise 
  • Payments to corporations that involve attorney’s fees or payments to a federal agency
  • Rental payments to property managers or real estate agents

What Can You Expect on the 1099-NEC Form?

Just like the 1099-MISC form, you have to view the 1099-NEC as a compressed form with many copies. However, it is much simpler and easier to fill out the 1099-NEC form than the 1099-MISC form. You will need to fill out the following information on the 1099-NEC form:

  • Any state or federal income withheld taxes
  • Recipient’s information such as name, address, and taxpayer’s identification number
  • Payer’s complete information that includes taxpayer’s name, address, and TIN or taxpayer’s identification number 
  • The total compensation paid amount to independent contractors and freelancers 

How You Can Get the Information from Independent Contractors and Freelancers

You just need to ask your non-employees to fill out Form W-9 to get all the personal information to file the 1099-NEC form. Once you combine your current accosting records with this information, you should be able to fill out the form 1099-NEC effortlessly. 

Distribution of 1099-NEC Form

Just like the form 1099-MISC, you will also have to distribute several copies of the 1099-NEC form. These copies include:  

  • Send Copy A to the IRS
  • Send Copy B to the recipient
  • Keep Copy C business and tax records
  • Send Copy 1 to the state-specific tax department
  • Send Copy 2 to the recipient as well 

What Happens to the Form 1099-MISC?

For the most part, 1099-NEC is the new replacement for the 1099-MISC form to report paid compensation to freelancers and independent contractors.

But if you have paid royalties of $10 or over $600, you will need to use the 1099-MISC form to report the payments to the IRS. 

Also, the non-employee compensation box includes direct sales of over $5,000. Other than that, the 1099-MISC form looks the same as before.  

Conclusion

Your method to report the compensation to freelancers and independent contractors will be different in the 2021 tax year. On the surface, it might come across as a more difficult way to file non-employee compensation.

But it simplifies and segments several elements you would compress together in the precious MISC form. However, the key is to get familiar with 1099 forms and learn “how” and “when” to file.

Remember, you can always seek the services of a professional tax specialist who can fill out and submit the 1099-NEC on your behalf. A tax expert can also help you distinguish non-employee from employees to make the filing process easier and on time.