What Is Form 1099-NEC for Nonemployee Compensation?

When businesses hire freelancers, independent contractors, or other non-employees, they use a specific tax form to report how much they’ve paid these individuals throughout the year. This form is called Form 1099-NEC, where “NEC” stands for Nonemployee Compensation. It’s a crucial form both for businesses and the workers they hire.

Understanding Form 1099-NEC

Form 1099-NEC is used by businesses to report payments totaling $600 or more to a non-employee, such as an independent contractor, freelancer, or any other individual who isn’t on the payroll. Before 2020, this information was reported on Form 1099-MISC, but now Form 1099-NEC is used exclusively for reporting nonemployee compensation.

Why Is It Important?

For freelancers and contractors, receiving a 1099-NEC helps them understand exactly how much they’ve earned from each client over the year, which they must report as income when they file their taxes. For businesses, issuing this form is mandatory if they meet the payment threshold, and it helps them prove they have correctly reported payments for tax purposes.

Key Details of Form 1099-NEC

• Box 1: Shows the total amount of nonemployee compensation paid to an individual during the year.
• Box 4: If any federal income tax was withheld from payments to the contractor (usually only done in specific cases like a failure to provide a Tax Identification Number), it would be reported here.

Example of Form 1099-NEC Usage

Let’s say Lisa, a graphic designer, does freelance work for a marketing firm. In 2024, she earns $10,000 from this firm. The firm would need to issue Lisa a Form 1099-NEC by January 31, 2025, reporting $10,000 in Box 1 as the nonemployee compensation they paid her.

Who Needs to File Form 1099-NEC?

Businesses need to file a 1099-NEC for every non-employee they pay $600 or more during the tax year. Non-employees should expect to receive a 1099-NEC from each client or company that meets these criteria. It’s important for non-employees to keep track of these forms as they need them to prepare their own tax returns.

Penalties for Not Filing Form 1099-NEC

If your business fails to issue a Form 1099-NEC or Form 1099-MISC by the deadline, the penalty varies from $60 to $330 per form (tax year 2024), depending on how long past the deadline the business issues the form.
If a business intentionally disregards the requirement to provide a correct Form 1099-NEC or Form 1099-MISC, it’s subject to a minimum penalty of $660 per form (tax year 2024) or 10% of the income reported on the form, with no maximum.

Key Financial Terms Defined

• Independent Contractor: A person who provides services to a company but is not an employee or agent of that company. They are often hired to perform specific tasks at a set price under a contract.
• Freelancer: Similar to an independent contractor, a freelancer is self-employed and typically provides professional services like writing, graphic design, or consulting.
• Nonemployee Compensation: Money paid to someone who does not work as a traditional employee. This compensation must be reported on Form 1099-NEC if it totals $600 or more in the year.
• Tax Identification Number (TIN): A number assigned to an individual or business for tax reporting purposes. For individuals, it’s typically their Social Security number.