As freelance style work has become more popular in the last few years, more people are having to fill out 1099s. But what exactly is a 1099, and who needs them? Here we have put together everything you need to know about 1099 Forms.
Form 1099 is used to report non-salary income to the IRS for tax purposes. That seems simple enough until you realize there are 20 different variations of this Form. The most popular of these variations is the 1099-MISC. 1099-MISC are used for any contractor who you have paid more than $600 to in the financial year. Other types of 1099 forms are used for things like prize winnings, dividends, or sale of personal property.
1099-MISC
1099-MISC is the version used for independent contractors that have been paid $600 in compensation, fees, or other taxable income within a tax year. The responsibility to file a 1099 lies with the company that hired the contractor. However, as a contractor, if you have not received a copy of your 1099, you should consider following up to make sure you receive it in time to file your income taxes.
Independent Contractor
Independent contractors are individuals hired on a contract basis to complete projects. An independent contractor is not the same as a traditional employee. When hiring freelancers through third party services or websites like Fivver or Upwork, you may not be required to submit a 1099 for them as the third party service is the one hiring them and not you.
$600 Cut-Off
Any independent contractor to whom you paid more than $600 within the financial year should receive a 1099. If you hire an independent contractor and pay them less than $600, you are not required to issue a 1099. However, the independent contractor is required to report those earnings when they file even if they fall under the $600 cut off.
Contractors vs. Employees
1099s are intended to be used only for contractors and not for traditional employees. You do not want to misclassify them as it can result in penalties from the IRS. So what is the difference between employees and contractors? Traditional employees are paid regular wages, and taxes are withheld from their wages by the employer. On the other hand, contractors are typically paid on a per-project basis, and they are responsible for their own taxes as nothing is withheld from their wages.
No 1099s For Corporations
On occasion, independent contractors are registered as S or C corporations. Whenever this is the case, you do not need to file a Form 1099 for them. You will be able to discern if they are a corporation or individual contractor from their W-9 Form. Corporations will usually include “Inc.” in their names.
Example Of 1099 For Small Business Owner
You own a small online clothing business and have a shipment of new products. You need product photography done for your new items, so you hire a photographer to take photos of your products. You pay him $1500 and hire a makeup artist and pay her $300. You also hire a model through a modeling agency named Pretty Models Inc. for $1000. When tax season rolls around, you are responsible for sending the IRS and the photographer each a copy of the 1099-MISC noting the amount you paid for his photography services. However, you do not need to do the same for the makeup artist because she earned less than $600. You also do not need to provide a Form1099 for the model because she was hired through a corporation and not as an independent contractor.
How To File
If you have a contractor for whom you need to file a 1099, you will need to submit Copy A of the Form to the IRS, and Copy B must be sent to the contractor. To complete a 1099, you will need to gather the following information:
Total amount paid during the financial year
Full legal name
Address
Social Security Number
This information is typically gathered from contractors by having them fill out a Form W-9. Have every independent contractor you work with fill out a W-9 so you can have the necessary information on record.
Copy A of Form 1099-MISC must be submitted to the IRS by January 31st, whether it is done electronically or by mail. If you file a physical form, you also have to complete a Form 1096. A Form 1096 is a cover sheet for mailing forms that report non-employee income like 1099s.
You can order any necessary forms here.
Depending on where your business is located, you may also need to submit 1099 forms with your state. An experienced CPA will be able to help you with these details.
Penalties For Missing 1099 Deadlines
Missing the filing deadline for 1099 comes with some penalties for each Form you file late.
-Within 30 days of the due date -$50
-Past the 30 days but before August 1st – $100
-On or after August 1st – $260
If for any reason, you intentionally fail to file a Form 1099, you risk a minimum penalty of $530 per Form with no defined maximum penalty.
If you are not able to file a 1099 form to the IRS on time, you can request an extension by using the IRS Form 8809, but you will still need to get a copy of the 1099 to the contractor by January 31st.
For this or any taxes related questions, contact us for more information or for help filing.
Please Note: This post is to be used for informational purposes only, and it does not constitute legal, business, or tax advice. Each person should contact us directly or consult his or her own CPA, attorney, business advisor, or tax advisor with respect to matters referenced in this post. FACT Professional Inc. assumes no liability for actions taken in reliance upon the information contained herein.