It is absolutely vital to keep on top of tax returns and providing all the correct and relevant information to the IRS. Failure to do this can, at best, lead to a fine and a slap on the wrist, or at worst, lead to prison time, huge fines, and assets being frozen. All organizations that have independent contractors must fill in the Form 1099-NEC, which is new this year, instead of the 1099-Misc of previous tax filing seasons.
A 1099-NEC must be used if an organization has made payments in excess of US$600 to a non-employee service, for example a contractor, freelances, or third party supplier. Similarly, a self-employed individual or contractor who has received over US$600 in non-employee compensation will also need to complete one of these forms.
Until this year, the 1099-Misc form was used to report miscellaneous income, including that related to self-employment (from both organization and individual). However, this year, the IRS has revived the 1099-NEC which has not been in use since 1982 as a dedicated for to declare non-employment income and expenditure.
Who needs to fill this in?
- Made payments to someone not an employee including bonuses, benefits, discretionary awards or payments)
- Made payments for services in the course of business or trade
- Made payments to an individual, corporation, partnership, or government
- Paid at least US$600 to the above mentioned groups
- Receive any non-employment income (i.e. income not subject to the usual deductions for taxes, Medicare, 401K etc…)
- This includes those who may have an employed job and well as self-employment
The Form 1099-NEC must be filed with the IRS is usually the end of January/beginning of February. For 2021, the deadline was the 1st February. From the 12th February the IRS began accepting and processing tax returns for 2020.
How to fill the Form 1099-NEC
Filling the form in is vital, with penalties applied for incorrectly filled in forms, and fines if the IRS is unable to properly scan in the information. One trick of the trade is to visit a specially dedicated sites that will ensure the form is filled in properly, and filed appropriately. This can help avoid any pitfalls that lead to fines, or worse.
- Download the form from the IRS website. It goes through the information required:
- Recipient’s taxpayer identification Number (TIN)
- Account Number
- Amount of non-employee compensation
- One form per contractor
- Online filing for over 250 forms
- For under 250 forms, these will need to be requested directly from the IRS (although is using a third party provider like QuickBooks they can facilitate this)
Keeping tax information organised throughout the year
This filing process can seem daunting, but by keeping all this information in order throughout the year completing these forms is straightforward and easy.
Keep paperwork together
This can either be in paper format, having a filing cabinet with sections for months, and different types of incomings and outgoings, for example business expenses, receipts, charitable donations and office supplies. This can also all be scanned in and kept electronically; whatever works best is the right course of action.
Make sure all financial statements are in one place; bank, employer, invoices, and freelance contracts. There may also be a need for mortgage statements, student loan statements, any investments, and social security statement.
Get the right forms from the IRS
There are many forms available in the IRS bank of forms that can be used at this time of year, and it is important that individuals and businesses fill in the correct ones. For freelancers and contractors, the Form 1099-NEC is one of the ones that is needed. Depending on individual circumstances, others may also be necessary.
Itemize deductions and expenses
This list can include contribution to retirement plans, donations to charity, healthcare expenses, mileage, real estate taxes, accountant fees, dependent children, and so on.