Do you operate a business that compensates freelancers, gig workers, or other self-employed individuals on a contractual basis? If you engage contractors in the United States, it’s crucial to understand your tax obligations, including the required forms like the 1099-NEC and 1099-MISC. These forms are essential for your tax filings and liabilities. Failing to submit the correct forms on time and report non-wage payments to contractors can result in fines and penalties. This article will explain what a Form 1099 is and how to properly report non-employee income to stay compliant with the IRS during tax season.
What is Form 1099?
A 1099 form is used by businesses to report payments made to non-employees, such as domestic contractors or remote workers abroad, to the IRS. This form is specifically for US workers. For instance, you don’t need a 1099 for a UK employee working in China, but you do need it for an American contractor in China. You must complete the form with detailed information about the payments made throughout the tax year.
Difference Between Form 1099-MISC and Form 1099-NEC
Until 2020, Form 1099-MISC was used to report payments to contractors, freelancers, and other service providers. To prevent system abuse due to differing due dates, the IRS reinstated the 1099-NEC in 2021 for reporting payments to non-employees. Here’s a brief on the two forms:
1099-MISC Form The 1099-MISC now reports other types of taxable income, such as:
- Rental income
- Prizes and awards
- Other income payments
- Medical and health care payments
1099-NEC Form Use Form 1099-NEC to report non-employee compensation for services rendered. This includes payments to contractors, freelancers, and other taxpayers.
How to Obtain a 1099 Form
Blank 1099 forms can be downloaded from the IRS website or ordered as physical copies from the IRS. Contractors will receive these forms from their payers for completion.
Completing Form 1099 in 4 Steps
Follow these steps to correctly fill out and file Form 1099 with the IRS:
Step 1: Fill out separate Form 1099s with the name, address, and total amount paid to each contractor.
- Collect Form W-9 from each contractor to obtain necessary details.
Step 2: File Copy A with the IRS.
- Send Copy 1 to the state’s Department of Revenue if required.
Step 3: Send Copy B to the independent contractor.
- Contractors need this form to file their taxes.
Step 4: Keep Copy C for your business records.
- This document helps track your wage expenses for your company tax return.
Filing Deadline for Form 1099
The deadline to file Form 1099 with the IRS is January 31st of each tax year. If this date falls on a weekend, the deadline extends to the next Monday.
Penalties for Not Filing Form 1099
Penalties for late filing of Form 1099 include:
- Up to 30 days late: $60
- 31 days late through August 1st: $120
- After August 1st or not filed: $310
- Intentional disregard: $630
