As part of your growth strategy, you may have decided to hire independent contractors to be included in your business solution. Good idea – some of the best talent in our economy exists in the form of independent contractors. From graphic design, to landscaping, to administration, independent contractors can provide small businesses with a wealth of support. However, when tax season comes around, these independent contractors are seen differently than your regular employees in the eyes of the IRS.
Independent contractors don’t receive a W-2 for the work they complete. Instead, they will use what is called the IRS 1099 NEC (Non-Employee Compensation) Form to calculate and file their taxes for the tax year 2021. If you’ve paid any independent contractors at least $600 in compensation over the course of the year, you must file a 1099 NEC Form with the IRS in order to report their income. “But I’m the creative force behind our company’s growth!” you might say. “I need to spend my time (and money) focusing on our next big idea or how I’m going to tackle the challenges we’ll face in the coming year.” Fortunately, TaxSeer.com, a leading IRS-authorized online filing service provider, has you covered. Our low-cost, secure model for e-filing your 1099 NEC and other forms makes tax season easy and convenient for you.
What is Form 1099-NEC?
Form 1099-NEC Online is a variant of Form 1099 used to report Non-Employee Compensation to the contractors. Now, the IRS has moved all non-employee compensation (NEC), defined as payments of $600 or more to independent contractors, income reporting from Box 7 of the Form 1099-MISC to the new 2021 Form 1099-NEC. All other traditional Form 1099-MISC income types, such as rent, other income, or royalties will continue to be reported on the Form 1099-MISC. However, there are no changes in the rules for determining income that should be reported as non-employee compensation versus other income types such as rent, other income or royalties. The introduction of 1099-NEC Form Online in 2021 is simply a change in the reporting mechanism to avoid filing deadline confusion and plug any possible fraud through 1099-MISC filing.
The boxes have been now rearranged on Form 1099-MISC. Box 7, where nonemployee compensation was once reported, and now it shows the check box for direct sales of $5,000 or more. The deadline for filing the 2021 tax year’s 1099-MISC is March 31, 2022, if filing electronically.
The new Form 1099-NEC is not a major change; The renewed 1099-NEC Form Online separates out nonemployee compensation from other sections of the 1099-MISC Form Online and imposes a filing deadline of Feb. 1, 2022.
Purpose of Filing Form 1099 NEC
Businesses that pay $600 or more in the course of trade or business to independent contractors for services will be impacted by this change. The form 1099-NEC will cover payments to consultants like architects, attorneys, accountants, and any non-employee sales commissions. Payments by federal, state, or local government agencies are also reportable but personal payments are not.
You must generally report a payment as NEC when you meet the following conditions:
- You made the payment to an independent contractor who is not your employee. However, if the independent contractor is registered as a C corporation or S corporation, a 1099-NEC will not be required
- You made payments of at least $600 to the recipient during the year
- You made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations)
- You made the payment to an individual, estate, partnership, or, in some cases, a corporation
Why was Form 1099 NEC introduced?
Form 1099 NEC was retired around 1983 and is being reintroduced in for the tax year 2021 for business and individual 1099 filing needs to address confusion created by the PATH (Protecting Americans from Tax Hikes) Act of 2015. The PATH act created different due dates for different types of income reported on Form 1099 MISC, leading to confusion for filers and possible penalties for late filings. It also increased the risk of tax fraud for many employers due to the urgency to file the forms with little attention to details. The IRS further required two filings of the 1099-MISC form from 2018: one filing for forms that contained information in Box 7 and another for the remaining boxes. Due to these multiple forms, there were penalties if a form with Box 7 information was filed incorrectly. To make matters more complex, there were multiple filing dates. Forms with Box 7 information were due the last day of January, while Forms 1099-MISC with no Box 7 information were due by the last day of February for paper filers and the last day of March for electronic filers.
From the tax year 2021, IRS decided to fix these complications by reintroducing the 1099-NEC and a consistent due date of the last day of January for both paper and electronic filers, with no option of automatic extension.
What is the required information to complete Form 1099-NEC?
Form 1099-NEC has Payer’s information (Name, Address, and TIN), Receiver’s information(Name, Address, and TIN), and the boxes to report Box 1 (non-employee compensation), Box 4 (Federal Tax withheld), and Boxes 5-7 (State information). Use Box 1 to enter the Non-Employee Compensation for $600 or more. Use Box 4 to enter the backup withholding information.
What are the due dates for Form 1099-NEC?
As January 31, 2022 falls on a Sunday, The due date for filing the 1099-NEC Recipient copy, IRS e-file, and IRS paper filing is Feb 1, 2022.
The new version of Form 1099 MISC, which will no longer include non-employee compensation, will follow the February 28 and March 31 filing deadline for paper and electronic returns, respectively.
What are the penalties for missing the Form 1099-NEC filing deadline?
The penalties for delay in filing form 1099-NEC are:
- $50 if filed within 30 days
- $100 if filed more than 30 days late, but before August 1
- $260 if filed on or after August 1
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