Who Receives a 1099-NEC?

A few years ago, the IRS published a new form called the 1099-NEC. NEC stands for non-employee compensation, meaning this form applies to business payments for services made to contract workers. Thus, many people or businesses performing services as contractors, not employees, should receive a 1099-NEC. Before the IRS released this form, employers used to report this compensation on a 1099-MISC.

Like many tax regulations, the complicated rules governing who receives a 1099-NEC still confound many employers. This quick guide to this vital tax form should provide a helpful starting place to simplify and secure the process.

Which Contract Workers Fill Out a 1099-NEC?

Employers should understand that 1099 refers to various forms that report nonemployee compensation. For instance, businesses still issue a 1099-MISC form to report royalty or rent payments. In contrast, the IRS intended for others to fill out a 1099-NEC, meaning independent contractors.

However, only some contract workers will receive this form. This list summarizes who gets a 1099-NEC:

Business services: The IRS only requires a 1099-NEC for business services, not personal ones. According to the IRS, a nonprofit organization must also supply these forms. For example, homeowners who hire contractors to remodel their kitchens don’t need to worry about 1099s. However, restaurants or nonprofit shelters that hire contractors to remodel their kitchens do need to issue a 1099-NEC.
Services, not products: A company would issue this form for paid services, such as from lawyers, accountants, freelance artists, and ride-share drivers. These companies would not issue a 1099-NEC for inventory, supplies, or software.
Services over $599: Businesses only need to send a 1099-NEC for payments that total $600 or more in a tax year.

Most Payments to C- or S-Corps Don’t Require a 1099-NEC

Typically, employers don’t need to issue a 1099-NEC for payments made to C- or S-corps. Some exceptions could include legal or medical costs. Payments made instead of interest or dividends also don’t require reporting on a 1099-NEC. Sole proprietors or LLCs taxed as sole proprietors must receive a form.

Businesses Should Collect W-9 Information Proactively

The complexity of the rules about which service providers need a 1099-NEC do not emphasize the importance of proactively collecting tax information. Companies should strongly consider making it a business practice to collect and validate W-9 information for any service provider who may need a 1099-NEC for the tax year.

Understand the Difference Between Employees and Contractors

The IRS has emphasized distinguishing between employees and independent contractors for tax purposes. For instance, employers usually need to withhold Social Security, Medicare, and income taxes for employees but not for contractors. Also, employees generally receive a W-2 form each year for tax reporting, and independent contractors get a 1099.

The IRS offers general guidance for determining if specific workers qualify as employers or independent contractors. Considerations include the degree of control that the employer exerts. Also, offering nonpaid benefits, such as vacation pay or a retirement plan, tends to qualify people as employees, not contractors.

The IRS says it can’t provide a one-size-fits-all definition of employee vs. contractor on its website. Employers can ask the IRS to review specific situations by submitting Form SS-8 to ask for a determination, but this form can take several months to process.

How to Get Help With the 1099-NEC and Other Business Tax Forms

It takes time and skill to interpret the complex and dynamic IRS regulations governing tax reporting for employee compensation. Even businesses with straightforward reporting requirements spend an incredible amount of time completing, processing, and sending tax forms to employees. Meanwhile, almost all employers entertain concerns that an error or missing information could generate compliance penalties or extra fees.

In contrast, Tab Service Company offers a secure, cloud-based 1099 IRS reporting platform that ensures efficiency and compliance. The system even electronically files forms to the IRS and makes it easy to mail or email copies to employees and contractors, and it even includes post-filing corrections.