Know Your Tax Form 1099-NEC

One of the critical federal income tax and payroll challenges to overcome is correctly classifying employees—that is, determining who falls under the category of employee, or common-law employee, and who is considered an independent contractor, or freelancer. Understanding how employee classification is viewed by governing bodies like the Internal Revenue Service (IRS) can be complicated, even for payroll providers like you. 

Misclassifying employees as independent contractors comes with financial risks for your customers, potentially leading to the need for amended returns, which is why it’s so important to understand when to use Form 1099-NEC. 

Correctly identifying employees versus contractors is a critical step in preparing accurate income tax returns and keeping your customers compliant. In other words, if your customers are taxpayers working with independent contractors, make sure you know Form 1099-NEC.

What is a 1099-NEC form?

A 1099-NEC form, or IRS Form 1099-NEC (non-employee compensation), is used to report payments to non-employees for federal income tax purposes. Many states also require this information for state income tax reporting. Non-employee compensation includes any kind of payment to an independent contractor, whether it’s a freelancer, gig worker, or other type of self-employed worker.

While Form 1099-MISC was once used for this type of tax filing, the IRS created 1099-NEC specifically for non-employee compensation, rather than lumping it in with other “miscellaneous” payments a business may make, such as rent or royalties. This change affects how both businesses and contractors report income, which can impact tax refunds or amounts owed. In addition to 1099-NEC, and 1099-MISC, there are even more 1099 forms to use in other situations. For example, Form 1099-G, which deals with certain government payments, and 1099-R, which is used to report distributions from pensions, annuities, retirement plans, and IRAs.

But when your customers are paying an independent contractor, they simply need Form 1099-NEC—plus the contractor's social security number or taxpayer identification number to complete the filing.

How do you identify a 1099 contractor?

First thing’s first: how can you identify a 1099 contractor versus an employee? There are many factors to consider, and two employee classification tests are commonly used for accuracy: the common law test and the reasonable basis test. At a high level, these tests dictate that:

•  An employee is usually paid hourly or has a salaried role at a company that handles their benefits and taxes for them. They work within company hours and usually have an at-will employment contract. 
• An independent contractor typically has control over their own schedule, covers their own costs of doing business, and doesn't receive benefits from an employer. This could be a freelance writer or designer, a consultant working on a specific project, a gig worker, or any other worker that falls within that scope. 
• In some cases, if a worker meets the criteria of an employee, they may be considered an independent contractor if the employer has a “reasonable basis” to do so.

Unlike employees, who are generally eligible for unemployment benefits if they lose their jobs, independent contractors typically don't qualify for unemployment compensation through the businesses they contract with. This is because employers pay unemployment insurance taxes and manage tax withholding for their employees, but not for independent contractors. Independent contractors are responsible for their own tax withholding and payments.

Still, the distinctions between employees and independent contractors are not always so clear cut. It’s vital that you use all resources available to you, like the IRS and Department of Labor (DOL) or a tax compliance partner, to help you make your determination.

When you’re sure you have identified an independent contractor, they should be onboarded with a 1099-NEC tax form.

When do you use Form 1099-NEC?

Regardless of the work they’re doing, you must issue a Form 1099-NEC to each independent contractor who earns at least $600 from you over the course of a calendar year. It doesn’t matter what kind of business you or your customers run— corporations, nonprofits, and even state and local governments all have the same requirements when it comes to tax compliance for non-employees. 

As mentioned above, your customers may hire freelancers for many reasons. There could be project-based work they outsource to an independent contractor or they could offer a service performed by gig workers, like rideshares or delivery services. As long as the non-employee earns $600 or more, they need a 1099-NEC form. It is also important to note that depending on payment for specific services, a 1099-MISC form may be more appropriate. For example, attorney’s fees require a 1099-NEC form for services rendered themselves but a 1099-MISC form for gross proceeds.

When are 1099 forms due?

There are different due dates for different 1099 forms. When you know the deadline for reporting taxable income, your customers can file them correctly and on time. 

Form 1099-NEC is due on January 31 of the year that directly follows the applicable tax year. If your customers are reporting non-employee compensation for the year 2024, the forms would be due on January 31, 2025. If the 31st falls on a weekend or federal holiday, the forms would be due on the next business day. Timely filing is crucial to ensure accurate income tax reporting for both the business and the contractor.

Where to get 1099-NEC Forms

As with any payroll tax form, your customers can get Form 1099-NEC directly from the IRS. 

While it’s simple to download the forms, filing can be more complicated. Depending on your payroll technology’s capabilities, you may have to prepare multiple copies to file with the IRS and your customers’ state tax departments. There should also be a copy for their independent contractors, as well as one to keep on file for their own tax records. However, the IRS’s Combined Federal/State Filing (CF/SF) Program for 1099s enables businesses in certain states to file only one federal copy without needing a state copy, potentially reducing the amount of paperwork you’re responsible for. 

To streamline this process in any state, avoid mountains of paperwork, and reduce the risk of overpayment, consider using online withholding forms like the ones offered by the Symmetry Payroll Forms API. It accurately completes Form 1099-NEC, along with over 120 additional online withholding forms, saving your customers confusion and time.