Whether you are a contractor or an employer utilizing the services of a independent contractors, it is essential to pay attention to the way taxes are handled. While contractors are not by definition employees, an employer still needs to issue a 1099 MISC to all eligible contractors. If you are not sure who’s a qualified contractor or how to issue a 1099 MISC, keep reading, and we will show you.
What exactly is a 1099 tax form?
A 1099 is a "information filing form" used by the IRS to record non-salary income for federal tax reasons. There are 20 different types of 1099s, but the most common is the 1099-NEC. If you paid an independent contractor more than $600 in a fiscal year, you must file a 1099-NEC form.
Tax dividends, prize prizes, interest income, IRA distributions, state tax refunds, various government payments, the sale of personal property, and even credit card debt forgiveness are all ways for an individual to gain money. These sorts of earnings are reported on several forms of Form 1099s, which you may learn more about here.
Who Needs a 1099 MISC?
Any contractor that gets paid $600 or more during the year must be issued a 1099 MISC. Contractors will need a 1099 from every client that they are working for that has paid them at least $600. These forms enable contractors to keep track of how much they have earned and allow them to file their taxes. You can think of a 1099 as the equivalent of a W-2 in the world of contracting. The difference is that typically taxes are not withheld. The contractor will need to pay up when they file their taxes.
How to Issue a 1099 MISC
Issuing a 1099 is relatively simple. But, before you can issue a 1099 MISC, the contractor will have needed to fill out a W9. This needs filled out when the contractor first starts working for you. You must mail out all 1099 MISC forms by January 31st. Missing this deadline can result in significant fines from the IRS. Alternatively, you can hand-deliver the form if that is an option.
Now that all the technical stuff is out of the way let’s talk about how to issue a 1099. First, you will need an official form from the IRS. You can order one for free from the IRS, download if from the IRS website, or purchase one at a local supply store.
Once you have your form, simply fill out all of the fields on the form. Make sure all of the information is correct, such as names, addresses, social security numbers or employer identification numbers (EIN), and dollar amounts.
When Form 1099 MISC Must Be Filed
The basic rule is that you must file a 1099 MISC form whenever you pay an unincorporated independent contractor - that is, an independent contractor who is a sole proprietor or member of a partnership or LLC—$600 or more in a calendar year for work done in the course of your trade or business via direct deposit or cash. You are not required to disclose payments made electronically in the manner specified below.
However, keep in mind that a 1099 MISC is only required when an independent contractor's services are conducted in the course of your trade or business. A trade or business is an activity that is done for profit. Payments for non-business related services do not need the filing of a 1099 MISC. Payments to 1099 independent contractors for personal or domestic services, such as babysitters, gardeners, and housekeepers, are included. Running a home is not a profitable endeavor.
Furthermore, some business-related payments are not required to be reported on Form 1099 MISC, even though they are taxable to the receiver. These are some examples:
- corporation payments (except for incorporated lawyers and payments to doctors for professional services to a business)
- payments for goods, inventories, phones, freight, storage, and other such products, and
- rent payments to real estate brokers (but the real estate agent must use Form 1099 MISC to report the rent paid over to the property owner).
You do not need to submit a 1099 MISC with the IRS if you pay an independent contractor with a credit card, debit card, or through a third-party settlement organization (TPSO) such as PayPal or Payable. This is true even if you pay the contractor more than $600 over the course of the year. Because this reduces your administrative overhead, you may opt to pay independent contractors electronically. The payment processor may be required to record electronic payments to the IRS on IRS Form 1099-K, Payment Card and Third Party Network Transactions. This is determined by the amount paid to the contractor and the number of electronic transactions made throughout the fiscal year.
What happens if the 1099 filing deadline is missed?
Missing the deadline is not the end of the world, but you must pay the IRS penalties shown below for each late 1099 form:
- If you file within 30 days, you will receive a $50 rebate.
- When you submit more than 30 days late but before August 1, you will be fined $100.
- If you file on or after August 1, you will pay $260.
When you fail to file on purpose, you may face a minimum penalty of $530 each statement, with no maximum.
The penalty amount is determined by when you file the right information return. If you are unable to file on time, use IRS Form 8809 to request an extension. However, this does not extend the deadline for providing a copy of the 1099 to independent contractors, which is January 31.
You Also Need a Form 1096
In addition to the 1099 forms sent out to each contractor, you should also file a Form 1096. This form simply sums up the totals from all your 1099 MISC and is what you will send to the IRS with each 1099 MISC. You will also want to keep a copy for your records.
Stay On It
Now that you know the ins and outs of who needs a 1099 and how to issue one, you need to make it a priority to get them done and on time. Not issuing a 1099 MISC can result in hefty penalties. Make sure you have contractors fill out a W9 from the start and be meticulous about getting those 1099 forms out and postmarked no later than January 31st. The process is a piece of cake as long as you follow the guidelines. Make your own 1099 using our form generator.