Business owners often hire other people to help them successfully run their organizations. If you hire people as employees, you would have to file Form W-2 for them to track their wages. However, many small business owners hire independent contractors to complete various tasks as the need arises. Any time you pay a contractor more than $600 over the course of the calendar year, you need to file the IRS Form 1099-NEC.
In this guide, you’ll learn more about a 1099 and how to file it, no matter if you’re the payer or the payee.
What Is a 1099 Form?
The 1099 form exists to track the non-salary income of people filing taxes, particularly those who are self-employed or otherwise work as independent contractors. Since the Internal Revenue Service (IRS) needs to confidently know that people pay their income taxes on their entire income, they use the 1099-NEC to verify the income that people report.
Before the 2020 tax year, businesses used the 1099-MISC form to report non-employee compensation. However, beginning in 2020, the 1099-NEC form is used for this purpose. The 1099-MISC will continue to be used for other types of non-salary income.
If you did not pay a given independent contractor at least $600 over the course of the year, you are not required to submit the 1099 form for them. However, those working on a self-employed or independent contractor basis need to make sure they include all of their income on their tax returns, even if it does not appear on a 1099-NEC.
There are also additional versions of the 1099 form aside from the 1099-NEC and the 1099-MISC, such as the 1099-DIV. This form is for people who earned other non-wage income, such as prizes or certain investment accounts, but the 1099 form for non-employee compensation is the most common.
Who Needs to File a 1099 Form?
As a small business owner, you might find yourself working with a variety of independent contractors. For example, you might hire someone to design a logo or website for you. Anyone who hires an independent contractor to complete at least $600 of work needs to file a 1099-NEC for that contractor. More specifically, you will need to fill out Copy A and Copy B of the 1099 form. You will submit Copy A to the IRS, but you will give Copy B to the contractor.
If you work as an independent contractor, you can expect to receive a 1099 form from any clients you completed at least $600 worth of work. If you do not receive a 1099 form from a particular client, you should reach out to them about correcting the issue. As an independent contractor, you don’t need to submit the 1099 form to the IRS (since your client would have already sent Copy A), but you need to make sure that the income reported on the form gets included in your income tax return that you file.
Both the W-2 form that needs to get filed for employees and the 1099 form that independent contractors receive track the earnings of that particular worker. However, while the W-2 will automatically deduct certain taxes, the 1099 form does not, and the independent contractor must pay taxes and submit them to the government separately. Because of this key difference, workers and businesses need to understand when someone should have an "employee" classification and when they should remain an "independent contractor."
Employees vs. Independent Contractors
While it sounds easy to say that employees need a W-2 form and independent contractors need the 1099 form, it can sometimes be confusing to determine whether a particular worker is an employee or an independent contractor. Here are some guidelines that can make it easier to ensure you properly classify your workers:
- The IRS looks at the level of control the business has over the worker. Does the business have the right to dictate when and how the work is completed? That indicates more of an employee-employer relationship. If the control is limited to the final product that the business wants to be completed, that is more of an independent contractor -business relationship.
- The IRS also examines the freedom that the worker has. Are they able to pursue other business opportunities while completing work for you? Employers often prevent their employees from taking on some outside work but don’t have any control over independent contractors.
- What is the duration of the relationship? A professional relationship that has no set end date indicates more of an employee situation.
Knowing the proper designation can ensure that you file the correct form for the tax filings of all of your business workers.
For independent professionals, you want to make sure that your classification is correct, as well. If a business classifies you as an independent contractor, but you should be an employee, they might be liable for the taxes they should have paid on your behalf.
Deadline to File a 1099 Form
The due date for filing the 1099 form for your independent contractors is at the beginning of each year. Typically, the IRS requires the form to be submitted on or before Feb. 1. Submitting the form late can quickly result in penalties for your business. You don’t want your hard-earned money to go toward paying late fees, which can quickly accumulate. The late fees will get progressively higher with each 1099 that arrives late and according to how late they are.
Not only does submitting the form early give the IRS time to process it, but it also provides your contractors with valuable information that helps them properly file their own income taxes.
Beyond filing with the IRS, something you’ll want to think about with your 1099 is whether it needs to be filed with the state. Be sure to double-check your state filing program’s requirements or check in with a certified public accountant (CPA) to ensure you’re compliant with your state filing requirements.
If you are an independent contractor and have not received your 1099, you should reach out to the company to secure the form. While you have to record all of your income for tax purposes, having verification of the amount you have received from a particular company and making sure that matches what you have recorded yourself can help you avoid any accounting errors.
How to File a 1099 Online
The IRS allows businesses that have to file various tax forms to do so electronically, so they don’t have to worry about paper forms. They have built a special system, known as the Filing Information Returns Electronically (FIRE) System, to allow taxpayers to easily e-file their forms. In fact, anyone who has to file more than 250 returns in a particular year is required to use the e-filing option to submit their paperwork. The IRS also encourages anyone who has fewer than 250 returns to submit their documentation with the electronic filing system. The e-file form system helps the IRS process your tax documents faster and with fewer errors.
Filing information returns electronically does not have to be confusing. To successfully use the FIRE System to submit your 1099s, you will need to keep the following guidelines in mind:
- You cannot use a scanned or PDF version of the document. It can only be done through software that can render the document in a specific format.
- You must have a Transmitter Control Code (TCC) to submit these forms electronically or use an e-file provider with this code.
- You will need to establish a secret phrase and a 10-digit PIN and password to access and use the system.
- To successfully file electronically, you must create an account and apply for a TCC.
- You must still submit documents by the filing deadline.
Through the FIRE System, the IRS works to provide the convenience of an e-file service while remaining secure for all taxpayers.
Skynova Is Here to Help You With Your Business’s Forms
Tax season may not be anyone’s favorite time of the year, but understanding the important forms and their filing requirements can help you get through the season properly and with as little hassle as possible. With the 1099-NEC, you record non-employee compensation and submit the information to the IRS and independent contractor.
If you are interested in learning more about taxes for your small business or yourself as an independent contractor, we recommend further exploring our information on the W-2 form for your employees and the W-9 form, which your contractors fill out so that you can collect their Social Security number and important tax information.
Navigating all of these filing forms can be overwhelming, and we know that paperwork isn’t the most enjoyable part of running a business. That’s why Skynova offers multiple business templates to help you run your business successfully, including capturing bids and sending invoices to help make sure you get paid on time. Our software products also make it easy to keep all of your small business documents in one place. With record-keeping taken care of, you can focus on other aspects of your business, including filing tax forms.