Form 1099 for Independent Contractors: A Guide for Recipients
Small business owners have a lot of tasks to take care of during a tax season. One important tax form that can cause confusion is Form 1099 for independent contractors. To avoid any penalties after submission of the tax form, you need to identify the independent contractors.
Independent contractors are valuable assets for the business as long as they provide the service. For this purpose, they are eligible for the benefits of form 1099 too.
But what are the basic requirements of the independent contractor? How can you differentiate between an independent contractor and an average employee? What types of form 1099 employees are involved?
This article will answer all of your queries that can be confusing otherwise for any newbie.
Who is Eligible as a Form 1099 Employee?
It is normal for small businesses to consider third-party sources. They are freelancers, independent contractors, or self-employed workers who get paid for a gig.
Technically, the individual eligible for Form 1099 Employee is NOT an “employee” but considered as a worker as stated above.
Since they do not fall into categories of employees, these workers are not paid wages or a salary. Instead, an agreement is struck with the Form 1099 employee.
The stress of withholding income taxes, paying social security and Medicare taxes, or unemployment taxes is something not to be concerned about.
An average employee is provided with a W2 Form, whereas Form 1099 for independent contractors is issued embarking the difference between the two.
Who are Independent Contractors?
IRS states clearly in the guidelines that differentiate the worker as an independent contractor or an employee.
The distinction between the two helps the companies to identify which individuals are eligible for income taxes or FICA taxes.
To highlight the differences between the independent contractor and employee, business owners must observe the basic criteria;
- Behavior control – Whether the company controls the actions of workers or not and how they perform their jobs?
- Financial control – Does the company influence the worker’s job in terms of expenses like providing tools and supplies to complete the job?
- Contractual relationship – Did the company sign any contract with the worker or not? Does the worker have any benefits like pension, insurance or vacation days, etc?
Take a detailed look at these three categories before determining whether the individual is an employee or independent contractor.
The key factor is the level of control the individual has over his job.
6 Types of Forms Required to Hire Independent Contractors
Now that the dust has settled it’s time to learn about the types of forms usually involved with hiring independent contractors. Form 1099 for independent contractors is crucial but what other forms you will need?
All forms are important to consider for your understanding of what to expect during a tax season.
According to the 2020 regulations, miscellaneous income should be reported using form 1099-MISC for independent contractors. Rents, accolades, and prizes, for instance
An independent contractor who gets paid more than $600 for their provided service throughout the year is given Form 1099-MISC.
It should be sent by January 31. It’s best recommended to send it via email.
The rules for the 1099 form independent contractor 2020 must be read in order to understand the significant requirements for the 1099-MISC form.
You may occasionally be required to comply with specific backup withholding requirements for payments relating to 1099-MISC as an employer.
According to IRS regulations, backup withholding is necessary when a taxpayer disregards the following directives:
The TIN (Taxpayer Identification Number) is not given by the payee to the payer for use on information returns, such as Form 1099-MISC.
On a personal tax return, the payer neglects to disclose any interest or dividend income from the previous year.
It should be sent by January 31. It’s best recommended to send it via email.
If a taxpayer fails to comply with these filing requirements, the employer may deduct 24% from any subsequent payments made to the payee. The IRS must receive the withholding amounts from the company.
To report the payments made to a contract worker in the last year, Form 1099-NEC is issued. This form is used to cover royalties, rent, or other income payments.
Each independent contractor that the business has paid more than $600 for their services in a year must be given a 1099-NEC independent contractor tax form.
Independent contractors who use the 1099 form must report all payments on their tax return. This covers any payments that come to less than $600 overall.
Note: Individual and partnership payments are included in non-employee compensation.
On the other hand, some payments do not require a 1099-NEC. This comprises:
- Employee travel expenses for business purposes
- A corporation, including any LLC (limited liability company) treated as a S or C corporation for tax purposes, may receive payments.
- Payments for merchandise, storage, or freight
Also take note that the 1099-K form contains information about payments received via third-party networks, including credit card payments.
Independent contractors compensating at $600 or more are eligible for this form.
Independent contractors put in the Request for Taxpayer Identification Number (TIN)and Certification with W-9 Form. a TIN can either be Social Security Number (SSN) or an Employer Identification Number (EIN).
This form should be kept for 4 years (minimum) when an independent contractor is hired.
In case the business owner is confused about the worker’s status the IRS provides independent contractor guidelines.
The Department of Labor, State Compensation Board, and State Worker’s Compensation Insurance Agency all provide exclusive guidelines too.
The contractor’s invoices are involved in the payments. The equipment tools, mileage, etc involved during the job of an independent contractor are not included in the expense report it is separate from our business.
However, you need to ensure that invoices are in correspond with Form 1099-MISC.
Attorneys are involved when a contract is signed by an independent contractor. It involves the fee, results, dates for deliverables, etc. the contract also covers the memo that taxes or benefits will not be paid to the independent contractor.
If the independent contractor is using his own tools or equipment to get the job done, then it must be mentioned in the contract.
Understanding 1099-MISC Forms Requirements
According to the 2020 guidelines, Form 1099-MISC reports thE miscellaneous income. It includes rents, prizes, and awards.
Sometimes the payer requires a backup withholding due to the payments. The backup withholding is required when following guidelines are not followed as prescribed by the IRS:
A taxpayer Identification Number is not provided to the payer. In absence of this information, they will not be able to complete Form 1099-MISC.
Failing to report internet income or dividend income of the last year on personal tax returns.
When the taxpayer fails to fill these requirements, 24% of future payments to the payee or are withheld. The withholding amount is then forwarded to the IRS. hence the reason, Form 1099-NEC MUST BE provided to the independent contractor.
Overviewing Form 1099-NEC
An independent contractor earning $600 or more is eligible for Form 1099-NEC. It included all payments made to the contractor even if it was less than $600.
You need to remember that non-employee compensation like payments to such individuals and partnerships are included in it.
But the payments not included in the 1099-NEC Form are;
- Corporation payments – With a limited liability company or a C Corporation or an S Corporation for taxes
- Business travel allowances are paid only to the “Employees”
- Merchandise, freight, or storage payments
In case third-party payments occur, like credit card payments, then they must be reported on Form 1099-K. Such as businessmen who make payments through PayPal to the contractor, then Form 1099-K must be received from PayPal.
The number of transactions made and the total amount paid to the contractor will be the contributing factor to the issuance of Form 1099-K.
You can consult with a CPA about Form 1099 for independent contractors.
Completion of Form 1099-NEC
Three essential pieces of information must be provided;
- Box 1 – The non-employee compensation, list the company’s TIN as Payer’s TIN and list the firm’s name and address on the top left section of the form.
- Recipient’s TIN, name, and address.
- Federal and state income tax withholding is to be recorded.
IRS does not require you to report the state income earned or your company’s state tax identification number. But small businesses will find it easier to fill in information for state income tax filings for contractors.
Submission of 1099-NEC Forms
Every form requires a specific number of copies and so does the 1099-NEC form for independent contractors. But you need to remember to produce the 1099-NEC Form before February 1. The form is to be provided to each contractor hired and it should be accurate to file.
Following are the required copies of Form 1099-NEC.
- Copy A is submitted to the IRS (alongside Form 1096). It reports all total dollar amounts.
- Copy 1 is sent to the state’s department of revenue.
- Copy B is provided to the recipient i.e. the independent contractor.
- Copy C is for the personal records stating the wage expense on your business tax return.
How Form 1099 for Independent Contractors is Used?
Schedule C is used by freelancers and independent contractors to report their self-employment income. The process to report the income earned consists of;
- Part 1 Reports the earned income of the independent contractor. It is posted on line 1 (gross profits and sales).
- The net profit or loss of the independent contractor is mentioned on Schedule C as additional income.
- Total adjustments made on Schedule 1 adjust don line 10a.
- Federal income tax if withholding is also reported on Form 1040.
Personal Income Taxes
Usually, most Form 1099 for independent contractors do not withhold income tax. So you need consultancy from a tax advisor to learn about the process in detail.
For Medicare and Social Security taxes, a different approach is used to process it. An independent contractor needs to pay the employer and employee share of the FICA taxes i.e. 15.3%. After that, the contractor can deduct the expense portion by 7.65%.
Preparing tax forms is a tedious task. Taking care of the 1099 employee form is as time-consuming as other tax forms. The process seems straightforward, but you can make serious errors while filing taxes.
This article acts as a guide to help you understand independent contractors and the involvement of Form 1099. But if it’s overwhelming for you, My Count Solutions can help automate the tax process for you. Save time, energy, and frustration altogether by hiring an accountant or tax prepare now.