If you're a contractor, freelancer, or business owner, you've more than likely heard of the 1099 form as a part of your tax planning. However, 1099 form definition can take on a unique meaning based on your perspective and the role you play in the business relationship. Let's take a closer look at the 1099 form definition as well as what it can mean from a contractor's, freelancer's, and small business's tax planning perspective. Read on to learn more and don't hesitate to reach out to the team at the MB Group for tailored small business accounting and tax planning solutions.
What Is a 1099 Tax Form Definition?
The 1099 form is a key information filing form that is utilized to report non-salary income to the Internal Revenue Service for federal tax purposes. While there are over 20 different types of 1099 forms, the 1099-NEC is undoubtedly the most popular. In the event your business paid an independent contractor or freelancer more than $600 in a year, you'll be required to complete the 1099-NEC. Other types of income that need to be reported on a 1099 include:
- Interest income
- State tax refunds
- Tax dividends
- IRA Distributions
- Prize winnings,
- Sale of personal property
- Miscellaneous government payments
- Credit card debt forgiveness
- And more
However, if you're a business owner, you should become familiar with the Form 1099-NEC.
What Is the Form 1099-NEC?
As we previously mentioned, if your business paid a freelancer or independent contractor $600 or more for their services during the fiscal year, you'll need to file the 1099-NEC. This form is utilized by the IRS to verify your income tax levels. In addition, if you paid a partnership over $600 during the course of the year, you will be required to issue them a 1099-NEC.
Contractors Vs Employees and the Form 1099 NEC
If you have "employees", you will need to file a Form W-2 to report their wages, tips, and other types of compensation you've paid to them throughout the year. This means you shouldn't file 1099 for your employees. The IRS clearly delineates the difference between nonemployees vs employees. And the IRS is often on the lookout for companies who attempt to misclassify employees as independent contractors — usually to avoid paying Medicare taxes and social security taxes. In the event you do misclassify an employee as a contractor, you could face stiff penalties.
Does My Business Need to Submit Form 1099 If We Paid Less than $600 to a Contractor?
In the event your business paid a contractor less than $600 during the year, you do not need to submit Form 1099-NEC.
Independent Contractors & 1099-NEC
If you are an independent contractor, you are not responsible for filing the 1099-NEC. However, you should receive one for each client you performed services for that either met or exceeded $600 during the year. In fact, you will need to report all of your income on Schedule C — even if the payments are less than the $600 threshold and wouldn't show up on 1099.
1099-NEC and Corporation
If your business works with an independent contractor who is registered as an S Corporation or C Corporation, you will not be required to file 1099 for them. You can learn whether the contractor is incorporated from the information on their W-9. Because of this, it's important to request a W-9 from anyone you contract business out to. One tell-tale sign of a contractor working as a corporation is if they have "inc." in their business name.
Freelancers and Form 1099
Over the years, there has been a significant increase in the number of marketplaces for freelancers, such as designers and writers. And these marketplaces, such as Writer Access, Zerys, Fiverr, and Upwork do not provide tax documentation. This is because they are technically considered payment settlement entities. Businesses that hire workers on these platforms are not required to provide the freelancer with a 1099-NEC. On the other hand, if you are a freelancer who works through these platforms, you will be issued a 1099-K in the event you have more than 200 transactions and earn over $20,000. Otherwise, you will be able to find what you need to file your taxes in your account.
Contact MB Group CPA
Whether it's 1099, W-2, or any other document, taxes can be very complicated and confusing. However, it doesn't have to be! When you partner with the team at the MB Group, we'll do the heavy lifting so you can focus on growing your business.
Contact our team today to learn more about how we can help.