Certified Payroll Professional Practice Exam 2025 - Free CPP Practice Questions and Study Guide

Employers use Form 1099-NEC to report annual wages and withholdings specifically for independent contractors. This form is designed to capture non-employee compensation, which includes payments made to individuals who are not on the payroll but provide services to a business.

The use of Form 1099-NEC ensures that the IRS receives accurate information about the income that independent contractors earn, which should also be reported by the contractors themselves on their tax returns. When a contractor earns $600 or more in a year from a business, the business must issue this form to inform both the contractor and the IRS of the income provided.

The other forms listed serve different purposes: Form 1040 is an individual income tax return for personal income, Form W-2 is used for reporting wages paid to employees (not independent contractors), and Form 940 is used for reporting annual Federal Unemployment Tax Act (FUTA) taxes. Each of these forms has its specific function in the tax reporting process, highlighting the importance of using the correct form for compliance and accurate reporting.