Freelancing and independent contracting are becoming more common. Many of the most specific tasks that need to be done are given to these workers. Developers creating apps are just one example of the huge freelance economy. Small businesses and startups often hire contractors and freelancers at some point.
Freelancing and contracting provide many unique benefits to workers and businesses alike. However, they also currently make tax obligations more complex.
One way that freelancing and independent contracting make taxes more complicated is through Form 1099-MISC. If you’ve never heard of it and are already confused, don’t worry. We’ll go over:
- What the form is
- Who needs it
- Who is exempt and why
- How you can make your accounting easier
What Is A Form 1099-MISC?
Form 1099-MISC is a general-purpose IRS form that covers non-employee payments during the tax year. Full-time employee salaries are not included, however, many other payments for goods and services may oblige you to fill out the form.
Form 1099-MISC has been revamped for the 2020 tax year. Now, you must report all payments to non-employees on Form 1099-NEC (Non-Employee Compensation). So, you may now be required to report payments on the form for your 2020 compensation paid to non-employees.
Who Needs To Fill A 1099-MISC or 1099-NEC?
If you own a business or are in a trade, you must file a Form 1099-MISC.
Freelancers, contractors, and any other non-employees who have been paid more than $600 for their services must receive a Form 1099-MISC from the payer. In 2020, these freelancers or contractors will receive a 1099-NEC. There are still several other cases where a Form 1099-MISC is needed. The form covers all forms of “non-employee compensation.”
According to the IRS, non-employee compensation is defined by all the following:
- Payments made to an individual, partnership, estate, or (Refer to “Exemptions”) corporation that is not your employee
- Payments made for services in the course of your trade or business
- The payments totaled at least $600
Remember that a Form 1099-MISC is meant for payments made for the purposes of running your business. You are not obliged to fill the form for personal payments.
If you’re still confused or in doubt, the best course of action is to just fill the form out. If you fail to file a Form 1099-MISC when the IRS deems that you’re obliged to, you will have to pay fines and penalties.
The IRS lists all the payment types which must be declared on the form when made in the course of your trade or business for:
- Services performed by independent contractors or others (via 1099-NEC in 2020)
- Prizes and awards
- Backup withholding of federal income tax
- Crewmembers of a fishing boat
- To physicians, physicians’ corporations, or other suppliers of health or medical services
- For a purchase of fish from anyone engaged in the business of catching fish
- Substitute dividends (Brokers only)
- Tax-exempt interest payments (Brokers only)
- Crop insurance proceeds
- Gross proceeds of $600 or more paid to an attorney
- Payments to merchants or others to settle reportable payment transactions (to third-parties)
Not all payments to non-employees must be accounted for on Form 1099-MISC or 1099-NEC.
Payments made to corporations considered S-Corps or C-Corps are exempt. That includes LLCs considered S-Corps or C-Corps.
Payments to rental agents are always exempt.
Payments for utilities, freight, and storage are typically exempt.
If you pay someone via credit card or third party payment system, such as PayPal, you do not report those payments.
Lastly, payments such as wages or salaries to employees are exempt. This includes payments for business travel and associated expenses.
How To File Form 1099-MISC and 1099-NEC
You can find Form 1099-MISC in some office supply stores. But you can also find a copy built into payroll software and other services you use. The IRS website provides a PDF you can look at for reference, but you may not download it and fill it out.
Once you acquire the form, all you need to do is accurately fill it out and send each copy to its destination. If you’re mailing the form, you must also file a Form 1096 transmittal form to the IRS with Copy A. If you e-file your Form 1099-MISC or 1099-NEC, you do not need to fill the Form 1096.
Each Form 1099-MISC and 1099-NEC includes 2 necessary copies. There will be a Copy A you must give to the IRS and Copy B you must give to the payment recipient.
What You Need
To fill out the form accurately, you need to know several things. First, you will need to know the exact amount of money you sent to each qualifying recipient. Second, you will also need their taxpayer ID number, which requires receiving a Form W-9 from them. The W-9 will be very important if you go through an IRS audit.
When you fill out the forms, you send Copy A to the IRS online or by mail. You then send Copy B to the recipient.
When Form 1099-MISC Is Due
You are required to provide Form 1099-MISC and 1099-NEC to non-employees you’ve paid over $600 to before February 1st.
In general, it’s a good idea to send the forms out early. If you can get each Form 1099-MISC or 1099-NEC to non-employee payment recipients before January, they should have time to review the form and correct any issues they see.
Words Of Warning
Filling an accurate Form 1099-MISC or Form 1099-NEC for each non-employee is very important. If you pay for the services of a non-employee and fail to file the form, you can be fined $100 for each type of form.
If you file after the January 31st deadline, you will have to pay a fine based on:
- How late you pay
- The size of your business
Form 1099-MISC and 1099-NEC are a real pain in the butt. But understanding this form is important for keeping your business compliant with the IRS. One way you can avoid forgetting to file Form 1099-MISC or 1099-NEC while avoiding mistakes is to outsource these tasks. Cerebral provides not only the experience to complete these forms but also can help you determine if you are required to issue them to vendors. If you have any questions about this article, please contact us via our contact page.