Tax filing season can be both a dream and a nightmare. It’s a dream when you qualify for a hefty tax return. It’s a nightmare when you navigate a confusing tangle of complicated tax codes.
If you use or provide non-employee services, you may be required to file a 1099 NEC form. What is a 1099 NEC used for? Why do you have to file it?
We answer these questions and more, so your future tax filings won’t give you nightmares. Keep reading this article for everything you need to know about the 1099 NEC.
What is a 1099 NEC Used For?
The 1099 Non-Employee Compensation (NEC) form is used for professional services outside the usual employee-business relationship. The rise of gig economy workers and tax filing confusion promoted recent changes to the 1099 NEC form and its filing requirements.
The IRS has certain thresholds to meet before you’re required to file a 1099 NEC. These include total payments and types of services. Failure to properly file can result in fines.
Employees vs Non-Employees
It may be tricky for some businesses to classify non-employee compensation. “Non-employees” can include:
- Independent contractors
- Attorneys and law firms
- Sole proprietors
- Self-employed individuals
Generally, an employee is someone subject to their employer’s direct control. This applies even if they perform unsupervised work.
The company sets the procedures, performance marks, pay scales, scheduling, etc. Employees may negotiate elements like pay and benefits, but always work under company requirements.
Someone who is self-employed sets these terms themselves. They may negotiate certain terms through contracts, but your direct control ends there.
For example, you may hire an independent contractor to remodel your office space. You can negotiate the pay and the expected project length. The contractor, however, will largely perform their remodeling tasks with little to no direct control from you.
1099-NEC: IRS Purposes
The main uses of the 1099-NEC form are accurate tax reporting. This includes preventing deliberate tax fraud.
The employee vs. non-employee distinction is very important to the IRS. It affects:
- Federal income taxes
- State income taxes
- Social Security taxes
- Medicare taxes
When a business pays regular employees, these taxes are withheld automatically from their paycheck. Their yearly withholding is used to generate W2 forms during tax season.
Non-employees, however, pay their taxes directly to the IRS. These payments are made quarterly. They may also be subject to a self-employment tax.
1099-NEC: Business Purposes
The business uses of the 1099-NEC are to reconcile your reported compensation payments and your tax withholdings. A mismatch is a red flag for the IRS.
You must file a 1099 NEC when you meet the four main requirements:
- The total payments were at least $600 during the reporting period.
- The services were not performed by an employee.
- The services were for your trade, business, government agency, or nonprofit organization.
- The services were paid to an individual, partnership, estate, or corporation.
Miscellaneous requirements include cash payments for fish and payments to attorneys. Attorney payments refer to both attorney’s fees and/or any gross proceeds connected to legal services. After meeting the requirements, you can create the form through the 1099-NEC creator.
1099-NEC: Self-Employment Purposes
If you provide self-employment services, you’ll mainly use the 1099-NEC to file your tax returns at the end of the year. It will also reconcile your quarterly tax payments to the IRS.
This will help the IRS figure out if you qualify for money back, or if you still owe tax money. It also determines if you qualify for tax credits and deductions like the Earned Income Credit.
Filing Your 1099 NEC Form Painlessly and Accurately
What is the 1099 NEC used for? The answer depends on whether you’re the person paying for non-employee services, the self-employed services provider, or the IRS.
Filing a 1099 NEC form doesn’t have to be painful. The online forms are there to help you streamline the process without sacrificing accuracy.