Do you work as an independent contractor or consultant? Do you have a side hustle that brings in some extra income for you? If so, then you might receive a 1099-NEC form.
Have you hired a contractor or freelancer to do some business for you in the past year? If so, then you may need to file a 1099 form!
Do you know how to file a 1099 form? Do you even know what it is? Keep reading to learn more about what it is, why you might receive one or need to file one and how you would do that.
What is an IRS 1099 Form?
A 1099 form is a tax form for reporting income. If someone other than your employer pays you more than $600 over the year, they need to file a 1099. They fill it out and send copies to you and the IRS.
The 1099 includes taxpayer ID or Social Security number. The IRS will track it against the taxpayer ID to make sure they’re reporting their income appropriately.
If an independent contractor is a C- or S-corporation, you do not need to file a Form 1099 for their work. You can verify against their W-9 when you hire them.
There are around 20 variations, depending on what kind of income it is. There are 1099 forms for self-employment earnings, prize winnings, interest and dividends, retirement account distributions, government payments, and more.
What is an Employee versus an Independent Contractor?
Employees don’t receive a 1099. If they are on payroll with the appropriate federal, state, Social Security, and Medicare taxes deducted, then you will file a W-2 form for them instead.
Some employers will try to mis-classify workers as independent contractors to avoid paying these fringe taxes. There are significant penalties for doing this, so make sure you’re identifying them correctly.
A broad rule of thumb for the difference is that you hire an independent contractor to do a project. They can set their own hours and decide how the project gets completed. An employee works regular hours and you direct them as to when and how to do a project.
There are significant penalties for mis-classifying employees as independent contractors. Make sure you know how to tell the difference between an independent contractor and an employee before you submit a 1099.
One exception is if you hired a contractor through a freelance marketplace like Up work or Fiverr. These types of marketplaces are payment settlement entities and so you won’t submit tax forms for individuals you hire here.
Variations of the 1099 Form
There are many different types of 1099 forms. Here is a list of some of the different types of forms and why you might receive one.
A 1099-NEC (formerly a 1099-MISC) is for non-employee compensation over $600 in the year. Any funds paid to an independent contractor or self-employed freelancer are documented with this.
Every freelancer needs to report their income regardless of if they received a 1099-NEC or not. Even if your income from a company was under $600 that year you should still report it appropriately.
A 1099-DIV is for any dividends or distributions from stocks, mutual funds, or retirement accounts. A 1099-INT reflects any interest earned on these or interest-bearing accounts at a bank or credit union. If you make any withdrawals from a retirement account like an IRA, 401(k), or annuity you will receive a 1099-R.
Government agencies are responsible for reporting income tax refunds and unemployment compensation. These payments are documented with a 1099-G form.
Debt cancellation is also considered income and could be taxable. If you have a portion of your debt canceled by a creditor, they will file a 1099C to report the total amount and you will need to include it on your tax return.
Filing and Correcting a 1099 Form
If you paid an independent contractor more than $600 in the year, you will need to file a 1099 form. This is a fairly straight-forward process that you can do yourself or with your tax accountant.
You will need the following information for your independent contractor:
1. Name
2. Address
3. Social Security or Tax ID Number
The easiest way to acquire this is to request a W-9 from the independent contractor before they begin working for you. Most freelancers expect this as a standard operating procedure and will often include it with their invoice.
You will also need to include the same information for yourself/your company. And you will need the amount of money you paid to them.
The 1099 form has two sections: Copy A and Copy B. You will mail Copy A to the IRS and Copy B to the contractor. The deadline for mailing both Copies is January 31 of each year.
In addition, you will need to fill out Form 1096 that includes a total for all the 1099 forms you are submitting that year. You will mail this along with all your Copy A forms to the IRS.
Check with your state to confirm if you need to submit a 1099 form to them. Not every state requires it. Your tax accountant should be able to confirm if you need it or not.
If you made a mistake and need to file a 1099 correction, it’s possible to amend. If you miss the filing deadline you may need to pay a penalty to the IRS. The amount of the penalty depends on when you ultimately file the forms.
The Simplest Tax Form You’ll Ever File
If you are an employer who needs to send a 1099 form, don’t be intimidated by them. It’s a very straightforward tax form. With just a little bit of record-keeping throughout the year, you can easily file them every year.
Explore other articles on our site for more business and finance tips to help you manage your money in 2021!