As soon as your small business starts outsourcing its tasks to independent contractors is the moment you need to consider tax compliance. Independent contractors aren’t supposed to use the same tax forms as employees, but they may not always need certain forms, like 1099.
What Is a 1099 Form?
Knowing what a 1099 form is can help you understand if you need one in the first place. Form 1099 is an information filing form used to report non-employment income to the IRS. There are over 20 variants of this form, but you likely need a 1099-NEC if you’re hiring freelancers.
However, you can use other 1099 forms for other non-salary income, such as interest income, IRA distributions, tax dividends, prize winnings, the sale of personal property, and more.
What Is a 1099-NEC Form?
Form 1099-NEC is what you’ll use to tell the IRS that you paid an independent contractor, freelancer, or self-employed person, for their services. The IRS will use this information to verify a contractor’s income as well as the client’s income (yours) and your federal tax burden.
Independent contractors don’t have to file 1099-NEC themselves; the onus is entirely on the client. Instead, freelancers will report their income on Schedule C, even if it falls under $600.
When Should you Issue a 1099-NEC Form?
As a rule, businesses should issue Form 1099-NEC to a contractor or partnership if they hire them to perform $600 or more worth of work. However, there are some exceptions to this rule.
Corporations Don’t Need Form 1099-NEC
Some independent contractors will register as S Corporations or C Corporations and therefore don’t need to Form 1099-NEC to file their taxes. You can tell if a contractor is a sole proprietor or a Corp if they put this information on their W-9 or if their Corp\’s name ends with “, inc.”
Employees Don’t Need Form 1099-NEC
Under no circumstance should you file a 1099-NEC form for your employee’s wages. If you do, you’re misclassifying an employee, which could land you in legal trouble. To report employee wages, use Form W-2. If you’re not sure how to report a worker, check out this article.
Freelance Marketplaces Don’t Need Form 1099-NEC
Although freelance marketplaces don’t technically “hire” freelancers and are still independent contractors, you shouldn’t use Form 1099-NEC to report their income. Freelance marketplaces are classified as payment settlement entities and don’t need clients to issue any forms.
How do you File a 1099-NEC Form?
To file Form 1099-NEC, you’ll need two copies. Copy A is for the IRS, and Copy B should be mailed to the contractor. If you have the contractor’s Form W-9, filling out a 1099-NEC is easy.
Fill Out Required Information
Using the contractor’s W-9, find their legal name, address, and SSN or business number and put this information on Form 1099-NEC. The only information you need to locate is the amount you paid the contractor during the tax year. Check your bookkeeping to confirm this amount.
Submit Copy A and Copy B
You must submit Copy A to the IRS by January 31st and Copy B to the contractor by the same date. If you want to submit a physical form of Copy A, you can’t print one off from the website and send it to the IRS. You have to get a physical copy. Copy B can be printed and sent.
Send Copy A and 1096 Together
When sending you 1099-NEC Copy A’s to the IRS, be sure to submit a Form 1096. 1096 tracks every 1099-NEC you sent over the course of the tax year. You must submit this form by January 31st. Keep in mind that you don’t have to claim non-1099-NEC income on Form 1096.
Check State 1099 Requirements
Most states have a 1099-NEC filing requirement, but 11 states don’t. If you live in Alaska, Nevada, Florida, New Hampshire, Illinois, New York, Tennessee, South Dakota, Washington, Wyoming, or Texas, you don’t have to send a separate 1099-NEC form to your state.