Understanding Key Tax Forms: 1099-NEC for Contract Workers

Relying on contract workers can be a cost-effective solution for outsourcing short-term tasks in your company. When the tax season comes, you’ll likely have to fill out a specific set of forms for your independent contractors. For employers that are used to filling out W-2 forms, switching to 1099 may be tricky.

As an entity employing independent contractors, you should get familiar with tax forms W-9 and 1099-NEC. The 1099 tax form is often mentioned as the relevant tax form for independent contractors. However, there is a subset of 1099 tax forms that don’t apply to them.

Here’s all you should know about 1099 tax forms. Let's also cover the 1099-MISC vs 1099-NEC differences, and how to manage the 1099 forms as an employer.

What is a 1099 tax form used for?

1099 tax forms are a collection of different forms. Some of them aim to report the individual’s income that comes from sources other than a salary to the IRS. The payer is the one who is responsible for filling out all of the 1099 tax forms and sending them to the IRS and the individual.

Typically, a 1099 tax form will include information such as Taxpayer ID Number (TIN) or Social Security Number. Receiving a 1099 tax form means the money was reported to the IRS by the employer.

Types of 1099 forms

There are several types of 1099 forms. Since most of these are often called 1099 forms, it creates some confusion about which forms you can use for a specific purpose.

Types of 1099 forms are as follows:

1. 1099-MISC

You would use this type of form for reporting miscellaneous income. It includes prizes and rent, for example.

2. 1099-NEC

The 1099-NEC is the form used to report income paid to independent contractors. The IRS established it in 2020 to account for the growing gig economy in the US.

3. 1099-R

The 1099-R form is used for reporting retirement income or pension.

4. 1099-INT

If you have any interest income, you’d use 1099-INT to report it to the IRS.

5. 1099-DIV

Similarly to 1099-INT, you’ll use 1099-DIV to submit dividend income information to the IRS.

As you can see, only one of these records payments a business or an individual pays to an individual who is not an employee. It also contains information about the income and the type of income they’ve earned.

Using IRS tax form 1099-NEC for independent contractors

Now that you know your 1099 forms, you know that if you pay independent contractors, you can on the 1099-NEC form to report it.

There is some haze about the proper 1099-MISC vs 1099-NEC use. It is because until several years ago, the 1099-MISC was used for reporting income for non-employees. However, as independent traders became more prominent, the IRS created the 1099-NEC. It's used to distinguish payments to contractors from other miscellaneous expenses a company has.

To fill in the 1099-NEC form as an employer, you have to request a W-9 form from your independent contractors. The W-9 form will contain the information necessary for filing the 1099-NEC.

The W-9 form includes the contractor’s Social Security Number, or Employer Identification Number (EIN). It also includes their registered address. As an employer, you don’t have to submit the W-9 form anywhere. Rather, you’d keep it on file to ensure the data provided in the 1099-NEC is accurate.

You should file the form 1099-NEC with the IRS, and send a copy to the individual contractor by January 31.

You should fill out and have five copies of the same 1099-NEC per contractor. You should submit the first two copies to the IRS, and the second two to the independent contractor. The fifth copy should be kept on file in your company.

How to fill out the 1099-NEC form?

Filling out the form 1099-NEC requires three sets of information:

1. Information about your company

2. Information about the independent contractor

3. Amount paid.

For the first, you’ll need to include your information, such as name, address, and TIN. Double-check this information as it needs to be accurate and error-free. Otherwise, you may have to resubmit the 1099-NEC form.

The second section includes information you’ve received from your independent contractor on the W-9 form. It includes their name and address, and TIN, if applicable. Lastly, you’ll also need to include the amount paid to the contractor.

The additional fields on the form may or may not apply to your cooperation with the contractor. If they apply, it’s best to follow the guidelines set up by the IRS on their website on how to fill these sections.

When to use the 1099-NEC form?

The benchmark amount for the 1099-NEC form is $600. So, if your business has paid $600 or more to an independent contractor in the fiscal year, you must submit the form 1099-NEC to the IRS. This means you might have to fill out more than one 1099-NEC form.

You’ll need a 1099-NEC form for each independent contractor. When you submit the 1099-NEC with the IRS, you must send it with Form 1096, Annual Summary and Transmittal of U.S. Information Return.

Who gets a 1099-MISC form?

Form 1099-MISC is used to report miscellaneous business expenses. It includes rent, medical expenses, prizes, and compensation for a lawyer. There are several expenses that the IRS notes you should report through 1099-MISC, so make sure to inform yourself of those.

What happens if you use 1099-MISC instead of 1099-NEC?

These forms are similar, so it’s common to make a mistake while choosing between 1099-MISC and 1099-NEC. The latter is also new, and some employers may be used to using the 1099-MISC to report independent contractors’ income.

You must file a correction with the IRS if you’ve mistaken 1099-MISC with 1099-NEC. You don't have a time limit on corrections and you can file a correction for paperwork filed with the previous three years.

For filing a correction, you need another copy of the appropriate form. In this case, a 1099-NEC form. You want to check the box next to the word “CORRECTED” at the top. You’ll also want to send the form 1096 along with it.

What tax form does a subcontractor need to fill out?

As an independent contractor, a subcontractor should fill out a W-9 form and send it to the employer. The employer will use the information from the W-9 form to complete the 1099-NEC form. The employer then submits the 1099-NEC form to the IRS and sends a copy back to the independent contractor.

The contractor then uses the 1099-NEC to report income or loss from their sole proprietorship business. Sole proprietorships report their income and losses through Form 1040.

FAQ

What is the difference between a 1099 and a W-2?

The difference between 1099 and W-2 lies in employment type. 1099 is issued to independent contractors, while the W-2 form is for employees.

How do I get my 1099 tax form?

It is the employer’s or payer’s responsibility to deliver the 1099 tax form to you by January 31st. In some cases, the employer has room to deliver it by the 15th of February.

If you haven’t received your 1099 form by the middle of February, it’s advisable to contact your employer and ask about it.

Do I need to issue a 1099 to an independent contractor?

If your business has paid $600 or more to someone who was not your employee in the previous tax year, you have to issue a 1099 form.

How do I report independent contractor income on my taxes?

Independent contractors should use Form 1040 to report their business income and expenses.