Contributed by: MatthewD, FreeTaxUSA Agent, Tax Pro
January rolls around, and you're patiently waiting to receive tax forms in the mail. Slowly, the regular forms come, such as the W-2, 1099-INT, and 1098 for mortgage interest. Then a Form 1099-NEC arrives in the mail. What is this form about? An inspection shows it was from a company you did some freelance work for, and you don’t have a business. You thought they would send a W-2. Why did you get this form, and what do you do with it?
What is Form 1099-NEC
Prior to 2020, nonemployee compensation (NEC) payments, such as those made to independent contractors or freelancers, were generally reported in Box 7 of Form 1099-MISC. The IRS reintroduced Form 1099-NEC: Nonemployee Compensation, in 2020 (last used in the 1980s), specifically for reporting nonemployee compensation payments to reduce confusion and misclassification of income earned by independent contractors.
You generally receive a Form 1099-NEC instead of a W-2 because the company who hired you didn't consider you an employee and consequently didn't withhold income tax, social security tax or Medicare tax from your pay.
What to do with Form 1099-NEC
Form 1099-NEC is now exclusively used for reporting $600 or more of nonemployee compensation in a calendar year.
It’s considered self-employment income and reported on Schedule C, which means you may also include expenses associated with earning that income. For example, you might have a home office, supplies, internet, phone, auto, travel and possibly even meal expenses for freelance work you did. These may all be included on your Schedule C.
Self-employment tax
When you report income on Schedule C, keep in mind any net business income will be included as taxable income for income tax purposes. Additionally, you'll need to pay self-employment tax, which covers social security and Medicare taxes. As a self-employed individual, you're responsible to pay both the employee and employer amount.
Normally what you pay in tax on regular wages is 7.65% as an employee, and your employer pays the other half. However, self-employment means you pay double the tax at 15.3%. This may come as a shock with the increased amount of tax due since it was likely unexpected. Even if you have $0 taxable income, you may still have tax due since self-employment tax is not reduced by nonrefundable tax credits.
If you're just starting to earn nonemployee income, consider making quarterly estimated self-employment tax payments to avoid the shock of paying higher income tax.
What if it’s not self-employment income?
What if this wasn't a freelance job or self-employment income, however? Instead, it was temporary employment, like a summer job or holiday or busy season employment. There are some possible solutions.
- Contact the employer and explain your concerns. Ask them to issue you a W-2 instead. If they will, problem resolved.
- Report the income by filing Form 8919 following this menu path: Income > Uncommon Income > Other Income and select Yes at the “Wages not on a W-2 (Form 8919)” question. With this option, you'll only have to pay your share of the uncollected social security and Medicare tax on wages.
- Ask the employer to issue a 1099-MISC with the amount in box 3 as Other Income. That way you can still report the income, but it's not subject to self-employment tax.
Remember, this income must be reported on your tax return. You may need to report the 1099-NEC as self-employment income on Schedule C unless or until you resolve the issue and can amend your return. You may need to complete Form SS-8 separately for the IRS to determine your employment status.