Who must file: businesses that pay $600+ to nonemployees such as independent contractors, freelancers, or service providers
To report nonemployee compensation to IRS and the payee
- Reportable payments (services performed, commissions, professional fees, subcontractor labor)
- Non-reportable payments (merchandise, rent, employee wages, tax-free reimbursements)
- Backup withholding requirements (if contractor fails to provide a valid TIN via Form W-9)
- Required taxpayer information (name, address, TIN, amount paid)
Deadlines:
Recipient copies due: January 31
IRS filing deadline: January 31
Form 1099-NEC – Nonemployee Compensation
Businesses that compensate independent contractors, freelancers, or service providers must abide by IRS reporting obligations pertaining to Form 1099-NEC (Nonemployee Compensation). This form assists in reporting payments made to non-employees to ensure compliance with tax obligations.
For tax year 2025, the IRS has made its most recent updates to the Instructions for Forms 1099-MISC and 1099-NEC which includes changes to reporting requirements, e-filing thresholds, and other clarifications. The following summarizes who must file Form 1099-NEC, what to report and how the 2025 changes are likely to impact your reporting.
Who Must File Form 1099-NEC
A business or organization has to file Form 1099-NEC when it disburses payments of $600 or more in a financial year to a nonemployee for services offered during the course of a trade or business. This also includes independent contractors and other self-employed persons.
Some of the common reportable payees are:
- Freelance designers, writers, or developers hired for projects.
- Consultants providing advisory or technical services.
- Attorneys or law firms receiving fees for legal services.
- Contractual/Subcontractual service providers.
Generally, payments to corporations are exempt from the 1099-NEC requirement, except payments made for legal services and medical services, which are reportable 1099-NEC payments, regardless of the recipient’s incorporation.
According to the IRS, 1099-NEC reporting only applies to payments made in the course of a trade or business. Hence, personal payments, like making a home repair and paying a friend for it, are also excluded.
Purpose of Form 1099-NEC
Form 1099-NEC shows nonemployee compensation paid for services and reports this compensation paid to the IRS and the individual/entity receiving payment.
Reporting this way demonstrates tax compliance and income transparency. For businesses, this shows the documentation supporting the classification of workers and records deductible expenses. From the recipient’s perspective, this shows the record of income that will help them file the Schedule C and Schedule SE.
Form 1099-NEC is used by the IRS as a benchmark to see if self-employed individuals are accurately reporting all their income. Missing, incorrect, or late submission of this form will result in the issuer and recipient of the form receiving penalties.
Reportable Payments on Form 1099-NEC
Use Form 1099-NEC to report the payment made to non-employee service providers for the following:
- Professional Fees: Payments for the services of lawyers, accountants, or business advisors.
- Commissions: Earnings of independent sales agents or other sales brokers.
- Freelance or Contract Work: Payments for creative, technical, or manual services.
- Subcontractor Payments: Labor provided under a construction or service contract.
- Prizes and Awards for Services: Awards provided for professional work.
In addition, the IRS clarifies that starting in the 2025 tax year, excess golden parachute payments will move from Form 1099-MISC to Form 1099-NEC, box 3, for the reporting of excess parachute payments as defined under IRC § .size. These are payments to executives or key employees that are made upon termination of their service, that exceed certain threshold amounts.
Non-Reportable Payments
You don’t need to report every payment you get on Form 1099-NEC. Some payments don’t need to be reported to the IRS, such as the following:
- Merchandise and genuine goods: payments for goods and products, and not payments for services.
- Employee wages: compensated employees’ services as reported on Form W-2.
- Rent payments: are reported on Form 1099-MISC.
- Tax-free reimbursements: reimbursements under an accountable plan.
- Payments through credit cards or payment apps: a payment settlement entity reports these payments on Form 1099-K under section 6050W.
Knowing what payments you report to the IRS and those you don’t helps you avoid unnecessary filings and improper tax reporting.
Backup Withholding Requirements
Backup withholding happens when a contractor does not give a valid Taxpayer Identification Number (TIN) on Form W-9.
If you do not get a correct TIN or the IRS tells you the TIN you have is invalid, you have to withhold 24% of the gross payments and pay that to the IRS.
To avoid this, businesses should always ask for W-9s, and verify them, before any payments. The IRS also has a TIN Matching System you can use to verify that a payee TIN matches their legal name, to avoid penalties for mismatches.
Required Taxpayer Information
Each Form 1099-NEC must include complete and accurate taxpayer information for both the payer and the payee. You’ll need:
- Payee’s name and address
- Taxpayer Identification Number (TIN)
- Total amount of nonemployee compensation paid
- Payer’s business name, address, and Employer Identification Number (EIN)
The IRS allows truncation of a recipient’s TIN on copies furnished to the payee (for example, displaying only the last four digits). However, truncation is not allowed on forms filed with the IRS.
If you are filing multiple 1099s for the same contractor, you must include an account number to distinguish each record.
E-Filing and Threshold Updates for 2025
One of the most significant updates for 2025 concerns e-filing requirements. Under Treasury Decision 9972, the IRS lowered the electronic filing threshold from 250 returns to just 10.
This means that any business filing 10 or more information returns (including all 1099s, W-2s, etc.) in a calendar year must file electronically. The threshold is determined by aggregating all return types, not just 1099-NECs.
The IRS now provides several e-filing platforms:
- FIRE (Filing Information Returns Electronically) system for traditional filers.
- IRIS (Information Returns Intake System) – a newer online portal for direct e-filing.
- IRS Portal System – for electronic corrections and submissions.
Businesses can also use the fillable online PDFs available at IRS.gov/Form1099NEC to furnish statements to recipients.
Deadlines for 2025
The deadlines for filing Form 1099-NEC remain strict and unchanged under Section 6071(c):
- Recipient copies due: January 31, 2026
- IRS filing deadline (both paper and electronic): January 31, 2026
If the due date falls on a weekend or legal holiday, the deadline shifts to the next business day. The IRS does not grant separate extensions for paper or e-filing.
Late or incorrect filings can result in penalties ranging from $60 to $310 per form, depending on how late the form is submitted. Intentional disregard of filing rules can incur fines exceeding $630 per form.
Corrections and Common Errors
If a Form 1099-NEC has already been submitted but contains errors, you must file a corrected return, not a voided one. The IRS cautions filers not to check the “VOID” box on a correction, as that prevents the form from being processed.
Corrections can be submitted:
- On paper (see Part H of the General Instructions for Certain Information Returns).
- Electronically, using the FIRE, IRIS Application-to-Application, or IRS Portal systems.
Ensuring accurate data entry, particularly TINs, amounts, and recipient details, can prevent unnecessary rejections.
Conclusion
Every business paying contractors/authors, or freelancers needs to know the changes to the IRS 1099-MISC and 1099-NEC Forms. Updated thresholds for e-filing and digital compliance along with changes to ‘golden parachute’ reporting and e-filing, require your attention now more than ever.
Businesses have to complete 1099-NEC Forms for all contractors/authors or freelancers that paid $600 or more for non-employee profit or compensation. Businesses must take note of the deadline for reporting to contractors/authors and to the IRS, which is also January 31st.
Having the proper records and using the e-filing features will ensure reporting is accurate and all parties have reported profit or compensation for the year, thus simplifying compliance and avoiding penalties.
If you want to stay ahead of the new 1099-NEC e-filing rules and January 31 deadlines, reach out to Dimov Tax to review your contractor payments, prepare your forms, and file everything accurately on time.