Step 1: Do you even owe a 1099-NEC?
A 1099-NEC is a relatively new form in recent years making its breakthrough in 2020, before then this was originally found on Form 1099-MISC. The term “NEC” stands for “Non-Employee Compensation,” this is considered people who are NOT employees of your business/company but are instead paid for projects or an as-needed basis (you can read the standards as to what separates a Contractor vs. Employee here). The form 1099-NEC is due by January 31st each year (or the first business day after that, if January 31st falls on a weekend).
To determine if you’ll owe a contractor a 1099-NEC, they have to meet certain criteria. Which according to the IRS standards, is the following:
- They must be US-based (Live in the United States)
- They were paid $600 or more in a calendar year (Jan. 1st, 2024 – Dec. 31st, 2024)
- They provided a service to your business (*Read examples below)
- They were paid via check, cash, ACH, Zelle or Wire Transfer – NOT Electronic Payments such as Venmo, PayPal, Credit/Debit Cards (**more below)
- They’re a Non-Corporation (***Explained Below)
*Examples
Examples of people I’ve submitted 1099s for in the past for my clients:
- Landscapers
- Accountants
- Lawyers
- Consultants
- Trash-Pickup
- Painters
**Do I submit a 1099-NEC if I paid someone via credit-card?
In November 2024, the IRS reviewed and changed the payment standards required for issuing 1099-NECs.
Here’s the common theme, if you’re paying a contractor using a Credit/Debit-card, Venmo, PayPal you don’t have to issue a 1099-NEC and instead those companies will issue a 1099-K to the contractor.
Where it can get confusing…is if you’re using a Personal PayPal or Venmo Account to issue payments to contractors (which is illegal as no business should be operating their business out of these types of accounts). Venmo and PayPal won’t issue a 1099-K if it’s a personal account since 1099s are not issued to “Friends & Family.” If you stick to the business versions you avoid all the unnecessary 1099 drama that comes this time of year (which we can all avoid the additional stress that comes with tax season).
So a Quick Recap to go over everything mentioned above, you do NOT have to issue a 1099-NEC if you’re paying your contractor via a Business Venmo and PayPal Account, or if you pay your contractor via a Credit/Debit Card, instead these companies will issue a 1099-K to your Contractor. You owe a 1099-NEC to your contractor if they were paid via Check, Cash, ACH, Zelle or Wire Transfer.
Here’s a simple breakdown of it all, courtesy of Bookkeepers.com:
***What's A Non-Corporation?
A common misunderstanding with the 1099-NEC for many business owners is they think it’s only owned to individuals. 1099-NECs are also created for businesses, but there’s certain types of businesses that are exempt from receiving 1099-NECs, those companies are S & C Corps. Before I get to far, this is all covered on the W-9 Form which was last updated in Mar. 2024 (see below)
This section of the W-9 is based on how your contractor’s business is taxed, their tax classification.
If your contractor is a single-member LLC they’ll check: Individual/Sole Proprietor this is one of the common mistakes I’ve seen a lot of people make on the W-9s.
Note where it says LLC, this is for LLCs who elect to be taxed as a S-Corp, C-Corp, or a Partnership if there’s multiple members.
This can all be very confusing especially if this is your first time dealing with 1099s, with the recent changes that are supposed to be “making our lives easier” only seem to make it more complicated each year.
Step 2: Gathering the Contractor's Information
Since we’ve already talked a little about the W-9, let’s do a deeper dive into what this form is for.
The W-9 is the form you need to collect from ALL your Service Vendors preferably before providing them with any form of payment, to have your grounds covered when it comes January. It’s best to have them fill out the most recent W-9, which as mentioned before was last updated in March 2024. Below I’ll go over what you’ll need to collect for both Individuals & Businesses.
For Individuals
- Full Legal Name
- Legal Address
- Social Security Number (SSN)
- Signature of Form
- Tax Classification (as mentioned above)
For Businesses
- Full Legal Business Name (For LLCs & LLPs make sure LLC & LLP is included)
- Legal Business Address
- Employer Identification Number (EIN)
- Tax Classification (as mentioned above)
- Signature of Form
Tracking Payments
Once you have the completed W-9, the next step is to have great record-keeping on your end (which should be done throughout the year). This is to track all payments made to the Service Vendor, as you’ll need the total amount you’ve paid to enter into Box 1 on the 1099-NEC
Step 3: Filing your 1099-NEC
By this point, you should have all the information needed to know whether or not you need to submit a 1099-NEC. Now it’s time to file.
I’ve had experience with two software’s for filing 1099s, QuickBooks & Track1099.
Personally, I prefer Track1099, it’s cheaper & they also double-check your work through a verification process. You can also upload your QBO data so you don’t have to manually enter in any information.
I’d be happy to hear what’s worked for you though or if you plan on using other options, drop them in the comments!
Have Questions?
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