Non-reporting employees use a 1099-NEC (NEC stands for nonemployee compensation) form to account for their compensation; non-reporting employees include self-employed individuals, independent contractors, and freelance workers. In the field service business, time is something that we need to be mindful of, especially if you are self-employed. Ensure that your business submits the 1099-NEC forms by January 31 every year to prepare your tax returns.
The 1099-NEC form is not a new one. While it was recently reintroduced in 2020, the 1099-NEC form was actually used in 1982, until it was replaced with the 1099-MISC form. Form 1099-MISC was used to account for any payments of $600 or more made to a nonemployee. But tax laws change over the years, and we have now seen the re-introduction of 1099-NEC, a previously retired form.
The IRS reintroduced form 1099-NEC to help clarify deadlines when filing different types of payments. The 1099-NEC is simpler, as it has a single filing deadline regardless of the payment type. It can get complicated for a field service management (FSM) business to manage taxes for independent contractors. With deadlines mandated by the State Tax and Revenue Department, it is important to be aware of tax regulations for Form 1099-NEC. Additionally, it is important to also be cognizant of any state-specific guidelines impacting field service management businesses specifically.
Why FSM Businesses Need Form 1099-NEC and How to Apply?
Form 1099-NEC is used by field service businesses to account for independent contractors. The IRS has stipulated that if a contractor’s income is more than $600 in a tax year, the filing should be done by January 31. There will be an exception only if the field service business provides a valid reason for an extension.
While we are discussing Form 1099-NEC, we should also be aware of Form 1099-MISC and how these forms help your field service business. To know more, read on.
How Does Form 1099-MISC Differ from 1099-NEC?
The 1099-MISC form is used in the field service business by property management companies and real estate businesses, to name a few. The IRS uses the 1099-MISC form to report payments that are not subject to self-employment tax. This form is mainly used to report miscellaneous payments made by your field service business, hence the term “MISC.” These miscellaneous payments do not come under self-employment taxes. A few qualifying reimbursements include rent, legal settlements, and rewards.
Form 1099-NEC is used by field service businesses to report nonemployee compensation that is most likely subject to self-employment tax. It is commonly used by independent service providers and freelancers alike. Self-employed individuals should not include personal payments in this Nonemployee Compensation (NEC) form.
It may be of some relief to note that any payment to individuals not applicable on the 1099-NEC form can typically be reported on Form 1099-MISC. A few examples of nonemployee compensations are commissions, fees, awards, or prizes given to a nonemployee or any compensation made to someone, not on your pay scale.
Information Required to Complete Form 1099
- Your name, address, and phone number
- Recipient’s name, address, and TIN (Taxpayer Identification Number)
- Federal and state income tax withheld (where applicable)
- Total nonemployee compensation
For more details about filling out Form 1099, you can refer to the IRS website.
10 Facts About Form 1099-NEC You Should Know
- 1099-NEC can be filed only if the total payments exceed $600 per year; anything less than that need not be reported.
- Making payments to an independent contractor and issuing the wrong form can result in penalties.
- You require the contractor’s consent to file Form 1099-NEC.
- A copy must be submitted to the IRS during the tax season; File Copy A should be sent on or before 31st January to the IRS.
- If a third party (like a payroll company) acts as an intermediary, and withholds taxes from the payment, then those payments need not be reported on Form 1099-NEC.
- State-specific guidelines vary; the policies may vary depending on which state you reside in. To avoid penalties, it is advisable to check the State Tax and Revenue Department for any requirements regarding Form 1099-NEC.
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- A contractor can be taxed under 1099-NEC if they are functioning as a single-member or a partnership LLC. However, if they are an S-Corporation they need not file for Form 1099.
- Backup withholding is usually required by the IRS if a taxpayer fails to provide a correct taxpayer ID number on their W-9 form at hire.
- If there are any common errors on Form 1099-NEC that need correction, you are required to complete a new form and click the “Corrected” box at the top of the form. If you are filing a paper form, you must send the corrected Copy A and attach Form 1096 along with the corrected form for reference. Ensure that you send the forms to the correct IRS processing center for the changes to be amended.
- Use the FIRE (Filing Information Returns Electronically) system to submit your 1099-NEC forms online. Delayed or incomplete filing is subject to penalties from $50–$580.
As a field service business owner, it is crucial to understand how to correctly complete Form 1099-NEC, especially if you have hired independent contractors or freelancers as your field technicians. Though it may seem like just another tax form, it is essential to understand how the form must be completed. Having a good grasp of labor laws would be beneficial to complete Form 1099-NEC, this will help ensure that your business—and your nonemployees—are accurately reporting compensation and related taxes to the IRS.
You can also use third party-providers like QuickBooks to e-file your 1099 form; Zuper supports QuickBooks integration to help create a seamless experience. It may seem cumbersome, but creating a culture where paperwork is filled out correctly will help you to earn credibility with your employees. This helps your field service team and empowers your workforce further.
This post is intended to provide general guidelines only and should not serve as the basis for any legal or financial decision-making without consultation with professional advisors. Before you make any financial decision, you are advised to consult with your own tax or business advisor on matters referenced in this post.