Have you heard of the 1099 contractor form?
Well, if you are looking forward to hiring an independent contractor, you surely must-have.
But what is this 1099 contractor form? Who should fill it out? And what should a business know about Form 1099?
Once you are through this article, you will have all your answers. So, start reading and gather every possible information you must know regarding Form 1099!
What is a 1099 Tax Form?
A 1099 tax form is used for specificfor reporting the non-salary income to the IRS for federal taxes.
The 1099 form has around 20 variants. The most popular among these is the 1099-NEC. This variant of the 1099 form is an independent contractor tax form that employers should fill out if you have paid $600 or more in one financial year to an independent contractor.
Other 1099 forms are reported for individuals who earn from interest income, state tax refunds, IRA distributions, tax dividends, prize winnings, personal property sales, etc.
So, if you are a small business owner, you might have to deal with different 1099 forms.
Who is an Independent Contractor?
Knowing who is an independent contractor is important. And IRS provides distinct guidelines to determine if a worker is an independent contractor.
To identify the 1099 form independent contractor, as an employer, you must consider the following criteria.
- Behavioral control – To what extent can you control what and how the worker performs the job?
- Financial control – Do you have control over the material or resources aspects of the worker’s task? Who provides the resources for job completion? And do you decide which expenses are to be reimbursed?
- Employer-worker relationship – Do you have a written contract? Is the worker entitled to benefits like pension, paid leave, or insurance?
The IRS guidelines instruct the employers to take a look at the entire relationship for determining the status of the independent contractor. The primary aspect here is the extent of control you have over the worker.
If the degree of control you exert is less or the worker has a great deal of autonomy, then the worker is probably an independent contractor.
Who should Fill out a 1099 Form?
If you are thinking, ‘do independent contractors get 1099?’
Then, let us inform you that there are certain criteria to determine who should fill out the 1099 independent contractor tax form. Let’s see what they are.
- First off, if you have hired an independent contractor and paid them more than $600 for services, you must fill out a 1099 form for an independent contractor.
- Sometimes you might find an independent contractor registered as a C corporation or S corporation. In such cases, you do not need to fill out form 1099 for a contractor.
- Employers should fill out a 1099 contractor form for independent contractors only. Make sure you do not file a 1099 contractor tax form for an employee. So, get hold of the difference between an employee and independent contractors before submitting a 1099 independent contractor tax form.
- If you have hired an independent contractor from freelance platforms like Fiverr or Upwork, you don’t have to fill out a 1099 form for an independent contractor. This is because such platforms are payment settlement entities, and they do not provide any tax documents.
- A 1099 contractor form applies to partnerships. In other words, if you have paid a partnership more than $600 during the taxation year, then issuing a 1099-NEC form is a must.
Essential Requirements of an Independent contractor 1099-MISC Form
To know about the important requirements for the 1099-MISC form, it is necessary to get into the guidelines for the 1099 form independent contractor 2020.
The 2020 instructions suggest that form 1099-MISC for independent contractors is used for reporting the miscellaneous income. For instance, rents, awards, and prizes.
In a few cases, you, as an employer, might be required to follow certain backup withholding guidelines for payments related to 1099-MISC.
IRS guidelines tell that backup withholding is required when a taxpayer does not abide by the following instructions:
- The payee does not provide TIN (Taxpayer Identification Number) to a payer for using on information returns, including Form 1099-MISC.
- The payer fails to report the prior year’s interest or dividend income on a personal tax return.
A taxpayer’s non-compliance with these filing requirements might lead the employer to withhold 24% on any future payment to the payee. The business must be sent the withholding amounts to the IRS.
What is Form 1099-NEC?
The 1099-NEC independent contractor tax form must be provided to each contractor whom the business has paid more than $600 for their services in a year.
A 1099 form independent contractor must include all payments on a tax return. This includes the payments that total less than $600.
Note: Non-employee compensation includes individual and partnership payments.
However, certain payments do not need a 1099-NEC. This includes:
- Business-related travel allowances paid to employees
- Payments made to a corporation including any LLC (limited liability company) treated as S or C Corporation for taxation purposes
- Merchandize, storage, or freight related payments
Also, note that the payments made through third-party networks, including credit card payments, are reported on the 1099-K form.
How to Complete Form 1099-NEC?
Here’s what information you need to provide in the 1099-NEC independent contractor tax form.
- Mention the name, TIN, and address of the recipient.
- On the 1099-NEC contractor tax form, mention the non-employee compensation in Box 1. List your business’s Taxpayer Identification Number or TIN as payer’s TIN. Plus, mention your firm’s name, address in the top left section of the 1099 contractor form.
- Record any state income tax or federal tax withholdings, if applicable
After you have filled out the information mentioned above, you will find a space for reporting the state income earned and your firm’s state tax identification number. This information is not necessary for the IRS. However, several businesses include it to ensure that state income tax filings become easier and hassle-free for the contractor.
How to Submit Form 1099-NEC?
Now that you know how to prepare 1099 for an independent contractor and complete 1099-NEC, you must learn about submitting the form.
When producing Form 1099-NEC, you must provide four copies of the form to different recipients.
- The first copy gets submitted to the IRS along with Form 1096. Form 1096 reports all the 1099 forms for contract employees that have been issued. Plus, it includes the total amount of dollars spent as payments.
- The second copy Is submitted to the state’s department of revenue
- One copy of Form 1096 is provided to the recipient of the independent contractor
- The final copy is kept with the business for maintaining records. The form documents the wage expenses mentioned on your business tax returns.
The due date for producing the 1099-NEC independent contractor tax form is before or on 1st February. By this date, you are required to provide each contractor and the IRS a Form 1099-NEC. E-filing is the best option here as it becomes easier to meet the provided deadline.
The IRS uses these 1099 contractor forms to estimate the taxable income amount earned by the independent contractors. These reported amounts are then compared to the contractor’s tax returns. Hence, your 1099 forms must be accurate so that you can fill accurate tax returns.
How to File Form 1099 Online?
You can e-file Copy A of 1099 through the IRS FIRE system. You will need compatible accounting software for the process.
You will also need a Transmitter Control Code before using FIRE. Obtain TCC by filling out form 4419 and sending it to the IRS. Form 4419 must be submitted a minimum of 30 days before the tax deadline for Form 1099.
After you obtain your contractor’s consent, you can send them Copy B. Make sure you get the consent in a way that the contractor affirms receiving Copy B electronically. Mention email if you are planning to mail them the form.
The IRS guidelines suggest that your request for consent must include;
- Affirmation that the contractor will receive a hardcopy of the form if they do not consent to receive an electronic one
- Scope and duration of the consent
- How to receive a paper copy even if the contractor consent to receiving an electronic copy
- Instructions related to withdrawal of consent
- Process of updating information
- Hardware and software description for printing the form
- The conditions under which the statement will no longer be given
- A specific date when the form will not be available
What Happens if you Miss the 1099 Filing Deadline?
If you miss the deadline, there are IRS penalties that you will have to pay. The penalties must be paid for each 1099 contractor form.
- $50 – for filing the form within 30 days
- $100 – for filing the form more than 30 days late but before 1st August
- $260 – for filing 1099 on or post-August 1st
Intentionally missing the due date to file the 1099 contractor form will be subject to a penalty of at least $530 per statement. There is no maximum limit here.
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