If you work as a freelancer—or you’re a small business contracting out employment—filing your taxes may look a bit different than those who receive standard W-2 forms.
Small business owners have a number of tasks to complete during tax season, and one important step is providing 1099 forms to independent contractors. You’ll need to identify workers who are contractors, understand the process for completing a 1099-NEC form, and submit the forms properly.
If you’ve provided Form 1099-MISC to contractors in prior years, you’re still in the right place. The new Form 1099-NEC has replaced 1099-MISC to report nonemployee compensation.
Before we dive into exactly how to fill out a 1099 form, it’s important to understand what constitutes an independent contractor and exactly what the heck a 1099 form is. Read on to answer all your questions and ensure tax season is a breeze.
Who is considered an independent contractor?
Someone is considered an independent contractor if they are self-employed or contracted to perform work to another business as a nonemployee.
The IRS provides guidelines to determine if a particular worker is an independent contractor or an employee—an important distinction because companies do not have to withhold income taxes or FICA taxes (Medicare and Social Security) from an independent contractor’s payments.
Filers who work as independent contractors may request tax withholdings but the process is not required for all 1099 forms.
To make the determination, business owners should consider the following three criteria, which address the degree of control they have over the worker:
- Behavioral control: Does your small business have a right to control what the worker does and how they perform their job?
- Financial control: Does your business have a say in the material aspects of a worker’s job? In other words, do you decide which expenses get reimbursed or who provides necessary tools and supplies?
- Contractual relationship: Is there a written contract? Are benefits such as pension, insurance, or vacation days a part of that contractual obligation?
What exactly is a 1099 tax form?
A 1099 is an IRS (Internal Revenue Service) tax form known as an information return. There are several types of 1099 forms, and we explain the key differences here.
How to file a 1099 form
Once you’ve determined who your independent contractors are and you feel confident your books are in order, it’s time to file 1099-NECs. We’ll walk you through this step by step so you can ensure proper taxation.
Step 1: Understand the 1099 form
Businesses must provide a 1099-NEC to each contractor who is paid $600 or more in a calendar year. Independent contractors must include all payments on a tax return, including payments that total less than $600. Note also that nonemployee compensation includes payments to individuals and partnerships.
A number of payments do not require a 1099-NEC, including:
- * Payments to a corporation, including a limited liability company that is treated as a C corporation or an S corporation for tax purposes. Business travel allowances paid to employees.
- * Payments for merchandise, freight, or storage.
Payments through third-party networks—including credit card payments—are reported on Form 1099-K. If, for example, a business pays an independent contractor through PayPal, the contractor may receive a Form 1099-K from PayPal for those direct sales. For tax year 2022, the 1099-K reporting threshold of $20,000 in payments from over 200 transactions will remain in effect. Beginning in 2023, the required reporting threshold was lowered to a minimum of $600 in aggregate payments, regardless of the number of transactions.
Use accounting software to fill out a Form 1099-NEC for each contractor and consult with a certified public accountant (CPA) regarding the 1099 forms your business must provide.
QuickBooks offers 1099 e-filing services with QuickBooks Payroll1 and QuickBooks Contractor Payments. When you use QuickBooks Payroll or Contractor Payments, Your 1099s will be automatically generated and e-filed for you, saving your time and helping you prepare for tax season. You can file unlimited 1099s, including 1099-NEC and 1099-MISC2.
Step 2: Gather all necessary information
Make sure you have all necessary documents for each independent contractor you employ. Each independent contractor should have filled out a W-9 prior to providing any services. These provide you with the following information useful to filling out 1099s:
- Post the nonemployee compensation to Box 1 on Form 1099-NEC and list your company’s taxpayer identification number (TIN) as Payer’s TIN. You’ll also list your firm’s name and address in the top left section of the form.
- List the Recipient’s TIN, name, and address.
- Record any federal and state income tax withholdings, if applicable.
Finally, you’ll see a section to report state income earned and your company’s state tax identification number. The IRS does not require this information, but many businesses include it to make state income tax filings easier for the contractor.
Step 3: Submit the 1099 form
When you produce a 1099-NEC, you provide copies of the form to different recipients:
- Submit Copy A to the IRS with Form 1096, which reports all 1099 forms issued to contractors, and the total dollar amount of payments.
- Send Copy 1 to your state’s department of revenue.
- Provide Copy B to the recipient (the contractor).
- Keep Copy C for your records; this documents the wage expense that you post on your business tax return.
The due date for producing Form 1099-NEC is on or before January 31st You must provide a Form 1099-NEC to each contractor and to the IRS by that date. Many businesses e-file, and e-filing makes it easier to meet the filing deadline.
It’s also important to check state requirements. Certain states require businesses to file 1099 forms with them, so check with your CPA if you’re unsure.
How to file a 1099 form online
The easiest way to fill a 1099 form is electronically, and you can do so using the IRS Filing a Return Electronically (FIRE) system. Before doing so, you need to request a Transmitter Control Code (TCC) and submit it at least 30 days before the tax deadline for your 1099. You can request this by filling out a Form 4419.
From there, the IRS will alert you with your TCC and you can proceed with your FIRE account.
QuickBooks Contractor Payments and QuickBooks Payroll allow you to save time and money and e-file 1099s.
How contractors use Form 1099-NEC
Most freelancers and independent contractors use Schedule C, Profit or Loss From Business, to report self-employment income on their personal tax returns. Here is the process for reporting income earned on a Form 1099-NEC:
- Part 1 of Schedule C reports income earned by the contractor. The total amount earned on all 1099 forms is posted to line 1, gross receipts or sales.
- The subcontractor’s net profit or loss on Schedule C is posted to Form 1040, Schedule 1, as additional income.
- The total adjustments to income on Schedule 1 are posted as income on Form 1040, line 10a.
If any federal income taxes were withheld on a 1099, that total is also reported on Form 1040.
This can feel like a daunting amount of information and forms to fill out, so it’s okay if you’re still a bit confused. Below are some common questions about the 1099 process that we’re here to answer.
Who receives a 1099?
There are many types of 1099s. But, any contractor who has received $600 or more in non-employment income during the tax year must receive a Form 1099-NEC. This could include anything from commissions to paid labor. It is up to you, as a business owner, to issue these forms to your workers in the alloted time period.
What if I don’t get all of my 1099 forms?
If you don’t receive your 1099 forms by early February, contact your payer. If you’re still not seeing them by February 15th, you can call the IRS for help.
What if there are errors on my 1099 forms?
If there is a mistake or error on your 1099 form, such as the wrong address, a misspelled name, etc., contact your payer immediately and request a corrected form. If the payer has already filed the 1099 with the IRS, ask that they resend a corrected version.
Do I have to pay taxes on my 1099 form?
Usually, yes. However, there are some exceptions, so please consult a professional if you are unsure whether you need to pay taxes on your 1099 income.
When are 1099 forms due?
1099 forms are due to taxpayers by January 31st.
Making tax season a breeze
Preparing and filing 1099 forms can be tedious and time-consuming. While it may seem straightforward, the process can quickly become a headache if you employ a number of contractors.
Use this article as a guide for the process, but if you get overwhelmed, look for help elsewhere. QuickBooks Payroll can help automate the process and save you some time and frustration. Hiring an accountant or tax preparer can also help you manage the process.
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- Unlimited 1099s: 1099s are e-filed only for the current filing year and for payments recorded in the system. Excludes amendment.