How to File a 1099 for an Independent Contractor
Learn the correct process for reporting payments to contractors. This guide covers essential requirements for issuing Form 1099-NEC for accurate compliance.
Businesses that engage independent contractors must navigate specific tax reporting responsibilities. A common point of confusion arises from the use of different “1099” forms. While many associate these payments with Form 1099-MISC, the correct document for reporting service payments to a non-employee is now Form 1099-NEC, which stands for Nonemployee Compensation. This guide provides a clear path for businesses to understand and correctly file the necessary forms for payments made to independent contractors, ensuring compliance with federal tax law.
Determining the Filing Requirement
A business must issue a Form 1099-NEC to any individual, partnership, or estate paid $600 or more for services during a calendar year. This requirement applies to payments made in the course of your trade or business, which includes fees, commissions, and other forms of compensation for services. The threshold is based on the total payments made during the year, not on a per-invoice basis. Personal payments are not included in this requirement.
Certain payment situations are exempt from 1099-NEC reporting. Payments made to most C Corporations or S Corporations do not require a 1099-NEC. An exception to this rule involves payments for legal services, which must be reported. Additionally, if payments are processed through third-party networks, such as credit cards or services like PayPal, the responsibility for reporting shifts to the payment settlement entity, which would issue a Form 1099-K.
Information and Forms Needed for Filing
Before you can complete any tax forms, you must gather specific information from both your business and the contractor. For the contractor, you need their full legal name, current address, and their Taxpayer Identification Number (TIN). An individual’s TIN is their Social Security Number (SSN), while a business entity will have an Employer Identification Number (EIN).
The standard method for collecting this information is by using Form W-9, Request for Taxpayer Identification Number and Certification. It is a best practice to have every contractor complete and sign a W-9 before you issue their first payment. This form provides you with all the necessary details for the 1099-NEC and includes a certification from the contractor that the information is correct. The completed W-9 is for your records only and is not sent to the IRS.
You will also need your own business information readily available: your legal name, address, and your business’s TIN. When it comes to the forms themselves, you must use the official, scannable versions. Copies of Form 1099-NEC printed from the IRS website are not suitable for filing with the government and may result in penalties. Official, multi-part forms can be ordered for free from the IRS, purchased at office supply stores, or generated through specialized tax software.
A Guide to Completing Form 1099-NEC
Box 1, labeled “Nonemployee compensation,” is where you enter the total amount of money paid to the contractor for their services throughout the tax year. This figure should include fees, commissions, and payments for materials used in the course of providing the service. It represents the gross compensation before any deductions.
Box 2 is checked only if you made direct sales of $5,000 or more of consumer products to the recipient for resale. Box 4, “Federal income tax withheld,” is left blank unless you were required to perform backup withholding. Backup withholding, at a rate of 24%, can be required if a contractor fails to provide a correct TIN.
Boxes 5 through 7 are for reporting state-specific information. This includes any state income tax you were required to withhold and the payer’s state identification number. State filing requirements vary, so be aware of any obligations in the states where you conduct business.
Filing Procedures and Deadlines
After completing the forms, the next step is distribution and filing, which must adhere to strict deadlines. The deadline to furnish Copy B of Form 1099-NEC to the independent contractor is January 31 of the year following the payment year. This same date is also the deadline to file Copy A of the form with the IRS, regardless of whether you file by paper or electronically.
The different copies of the form serve distinct purposes.
- Copy A is sent to the IRS.
- Copy B is for the contractor’s records.
- Copy 1 is for the state tax department if required.
You should retain Copy C for your own business records. This documentation is important for substantiating business expense deductions on your own tax return.
If you are filing paper forms with the IRS, you must also complete and submit Form 1096, Annual Summary and Transmittal of U.S. Information Returns. This form acts as a cover sheet, summarizing the information from all the 1099-NEC forms you are sending. A separate Form 1096 is required for each type of information return you file.
Businesses filing 10 or more information returns in total are required to file electronically. The IRS provides a free online portal called the Information Returns Intake System (IRIS) for this purpose. Using IRIS or another third-party tax software eliminates the need to file a Form 1096. Remember that states may have separate filing requirements and deadlines, so checking with the relevant state tax agency is a final step.