If you are getting started as a freelancer or your own business is contracting outside assistance, you have likely heard of IRS Form 1099. And so how can you record it? Here is what you want to know.
1099 is a”data filing type”, used to report non-salary earnings to the IRS for federal tax purposes. There are 20 versions of 1099s, but the most popular is 1099-MISC. If you paid a different contractor than $600 at a fiscal year, you will want to finish a 1099-MISC.
A person may also earn money from tax benefits, prize bonuses, interest, IRA distributions, state tax refunds, mixed government obligations, the sale of private property, or credit card debt forgiveness.
If you are a small business owner, you’re most often be addressing Form 1099-MISC, so we’ll concentrate on this one.
What is a 1099-MISC Form?
1099-MISC is the version of Form 1099 you used to tell the Internal Revenue Service whenever you’ve paid an independent contractor (or another self-employed person) $600 or more in fees, compensation, real estate rent, prizes, awards, or any other kind of taxable income.
That’s $600 or more over the course of the entire year. The IRS uses this information to independently verify your income, and therefore your federal income tax levels.
If you’re an independent contractor, it’s not your job to file the 1099-MISC. But if you don’t receive a copy of the 1099-MISC from your client, you should follow up with them. Independent contractors will need to report all their income on Schedule C, even if it falls under the $600 range and wouldn’t show up on any 1099s.
What exactly does Independent Contractor mean
An independent contractor is anybody you employ on a contract basis to finish a specific job or assignment. Frequent examples include graphic designers, web programmers, copywriters, and societal networking advisers.
If you rent a freelancer via a third-party provider, you might not be asked to submit 1099 for them. As an example, if you employ a freelancer via Upwork, Upwork is really the one doing the hiring, which means you do not have to publish 1099.
These details change from one third party hiring agency to another. Have a look at the organization’s “About” or “FAQ” section for tax submitting details before you begin using their services.
Who should get a 1099 form?
All partnerships and contractors that did over $600 of jobs for the company should get 1099.
Who should complete a 1099 form?
If your business hired the contractor and paid them over $600 in a year, you’re responsible for issuing them a 1099-MISC. To put it differently, the payer matches out 1099.
The $600 cut-off
If you paid a different contractor than $600 over the duration of the fiscal year, you do not have to submit Form 1099-MISC for them.
Remember that if you are an independent contractor, then you still should report all of your earnings. Even when you didn’t put in $600 of effort to get a customer and never got 1099.
If you did cover a contractor over $600 for services, lease, or for any other kind of miscellaneous revenue payment, you want to submit 1099. However, there are exceptions to this rule.
Example of using Form 1099 for small business owners
Let’s say you have a mini-golf class, and it requires some touching up. You employ a local landscaper to enter and decorate the region round the eighteenth hole. He comes plants and in eighteen miniature palm trees.
During holidays, it is your choice to send him a Form 1099-MISC, documenting the amount of money that you paid him and the service you are paying him.
Now let us say a winter storm blows in and kills all of the palm trees. You realize, dependent on the local climate, tropical plants might not be a suitable decoration.
You determine which you just want giant replicate Easter Island heads from the eighteenth hole rather. You call your own landscaper from earlier. However, he tells you that he does not do Easter Island heads you are going to have to speak to somebody with a larger surgery.
You get connected with Worldwide Stonework Megacorp Inc., and they are only too Pleased to put in the heads. The fee is $6,000 (somewhat pricier than palm trees, however that really is a long-term investment).
You do not need to be concerned about sending 1099 to International Stonework Megacorp Inc., for the reason that they’re a company, not an independent contractor.
Example of using Form 1099 for Independent Contractors
Suppose you are a freelance graphic designer, and also a neighborhood coffee shop Named Whole Latte Love pays $1,000 to design their new logo. Come tax year, they ship you a Form 1099-MISC like they are supposed to.
Now assume you do not hear from Whole Latte Love for a few years. They finally return and need a mild design refresh of the emblem “something much more minimalist”. You receive the adjustments made in 1 day, they adore this, and you charge them for $450.
In this circumstance, they wouldn’t send you a 1099-MISC since you didn’t do $600 of effort for them. But, you will still have to report that $450 income in your tax return and cover self-employment and income tax on it.
How to complete Form 1099
You will find two copies of Form 1099: Duplicate A and Copy B. You have to report the exact same info on Copy B and ship it to the builder.
If you are an independent contractor and you are given a Form 1099, Copy B out of a customer, you don’t have to ship it to the IRS. You report the earnings recorded on Copy B in your income tax return.
1. Collect the required information
Before you can submit and complete 1099, you will have to obtain the following information available for every independent contractor:
- The Entire amount you paid them during the taxation year.
- Their legal name.
- The taxpayer identification number.
- Contractor’s official address.
The typical way of getting this advice is to get each contractor to fill out a Form W-9. As a best practice, you need to have a W-9 on record for all your individual contractors. Having contractors fill out a W-9 ought to be among the first administrative activities you finish after engaging their services.
Assess your accounting records to verify the total amounts you paid to each contractor during the taxation season.
As soon as you’ve got all the essential data, use it to complete Form 1099-MISC.
2. Submit Copy A to the IRS
Copy A of Form 1099-MISC has to be filed to the IRS by January 31, 2020, Irrespective of whether you file electronically or by email.
When you record a bodily Form 1099-MISC, you can’t download and submit a printed version of Duplicate A in the IRS site. Alternatively, you must get a bodily Form 1099-MISC, fill out Duplicate A, and send it to the IRS.
3. Send a Copy B to your Individual Contractor
When your Form 1099-MISC is finished, send Copy B to each of your independent contractors before January 31, 2020.
You’ll be able to download and print a current version of 1099 Copy B from the IRS site and submit it to an independent contractor. This approach is explained in further detail on the very first page of Form 1099-MISC.
4. Submit form 1096
In case you submit a hard copy of Form 1099-MISC, Copy A to the IRS, you also will need to complete and file Form 1096.
The IRS uses Form 1096 to track each physical 1099 you’re submitting for the entire year.
The due date for a 1096 form is January 31, 2020.
5. Find out if you should submit 1099 forms along with your state.
Based on where your company is established, you could also need to file 1099 forms with the condition.
Check in with your CPA and make sure you are compliant with your State 1099 filing requirements.
The best way to file 1099s online
You May e-file Copy A of Form 1099-MISC throughout the IRS Filing a Return Electronically (FIRE) system. This form has to be made with the assistance of the accounting program.
Before utilizing FIRE, you Want a Transmitter Control Code (TCC). You are able to ask for that a TCC by filling out Form 4419 and then mailing or faxing it to the IRS. This form has to be filed at least 30 days prior to the tax deadline to the Form 1099-MISC.
Once the IRS contacts you together with your TCC, then you might use it in order to make an account with FIRE.
You can send Copy B to the contractor via email but first, you need their consent to do so.
Consent should be obtained in a way that proves the contractor can get the form electronically. If you are planning to email them a backup, you should contact them via email to receive approval.
To comply with IRS principles, your request for permission must include the following:
- Affirmation of this fact that in the event the receiver doesn’t agree to receive a digital copy, they are going to be given a paper.
- The extent and length of the approval. For example, are they agreeing to get a digital copy this calendar year, or each calendar year that they work for you?
- How to request a paper copy from you, even when they’ve given permission to receive an electronic one.
- Instructions about the best way best to draw approval. They may withdraw consent at any time in writing, electronically or on paper.
- Under what circumstances the announcement might no longer be supplied for instance, in the event the contractor’s contract has been canceled, or when you wind up paying them less than $600 to their own services.
- The process that they will need to follow to upgrade their data with you.
- A description of the hardware and applications they have to look at and print the form.
- A date where the form won’t be accessible. By way of instance, if you’re making it available to get through your institution’s site, you need to inform them in what time that the form is going to be eliminated from the servers.
As soon as you’ve received approval from the contractor, you’re free to send them their Copy B.
Some providers may make this process much less labor-intensive. (Gusto, for instance, automatically asks electronic filing permission from all your contractors.)
When are 1099s due dates
The deadline to file Copy A with the IRS is January 31, 2020, if you’re reporting payments in box 7.
Otherwise, the deadline is February 28, 2020, if you file on paper, and March 31, 2020, if you file electronically.
The deadline for sending Copy B of Form 1099 for your own contractors is January 31, 2020.
The expected date is extended to February 18, 2020, if you are reporting obligations in box 8 or 14 of 1099-MISC.
What if you do not get your 1099 from an organization
If you are a contractor, it is your customer’s duty to send you a completed copy of this Form 1099-MISC from January 31, 2020.
In case you haven’t obtained Copy B of a 1099 from the customer by the deadline, and you think you ought to have, be certain that you ask it. You will need it to record your income taxes in April.
It doesn’t matter whether you receive a Form 1099-MISC or not, you must report all income earned on your tax return.
What happens in the event that you overlook the 1099 filing deadline
Missing the deadline is not the end of the Earth, but you’ll have to pay the next IRS penalties for every overdue 1099 form:
- $50 in the Event That You file within 30 days.
- $100 in the Event That You file over 30 days overdue, but until August 1.
- $260 if you file on or after August 1.
If you intentionally don’t file, you might be subject to a minimum penalty of $530 per statement, with no max.
The total amount of the penalty is dependent on when you record the appropriate information return. If you aren’t able to file on time, you can request an extension using IRS Form 8809. But this does not extend the January 31, 2020 deadline for submitting a copy of the 1099 to independent contractors.