If you’re getting started as a freelancer, or your small business has recently begun contracting outside help, you may have heard some tax season buzz about Form 1099.
What is a 1099? Do you need to file one? How do you get it filed? Here’s what you need to know.
What is a 1099?
Form 1099 is what the IRS refers to as an “information filing form.” It’s used to tell the IRS when someone receives more than $600 from a person or business other than their employer.
For small business owners and freelancers, the most important type of 1099 is Form 1099-MISC (the one we’ll focus on in this article). It’s used to report money paid to an independent contractor.
An individual can also earn income from tax dividends, prize winnings, the sale of of personal property, or other methods. These earnings are reported on other types of Form 1099, which you can read all about on this IRS page.
The $600 cut-off
If you’re a small business owner, you only need to submit Form 1099-MISC if you pay an independent contractor more than $600 during the course of the financial year.
If you paid them less than $600, you don’t need to submit Form 1099-MISC.
If you’re an independent contractor, keep in mind you still need to report all your income, even if you did less than $600 of work for a client and never received a 1099.
Don’t file a 1099 for corporations
It’s rare, but sometimes an independent contractor will be registered as a C corporation or S corporation. Form 1099 does not need to be filed for a contractor registered as a corporation, so make sure you double check what entity type your contractors are registered as.
Who needs to file a Form 1099-MISC?
If you’re a small business owner who has hired independent contractors, it’s up to you to file a 1099 for each of them.
If you’ve worked as an independent contractor, you need to receive a Form 1099 from each of your clients.
An example for small business owners
Suppose you own a mini-golf course, and it needs some touching up. You hire a local landscaper to come in and beautify the area around Hole Eighteen.
The landscaper works solo, operating as a sole proprietorship. He comes in and plants eighteen miniature palm trees. It looks fantastic, and only costs $3,000.
During tax season, it’s up to you to send him a Form 1099-MISC, recording the amount you paid him, and the service you're paying him for. You’ll also send a copy to the IRS.
Unfortunately, next year, a winter storm blows in and kills off all the palm trees. You realize, based on the local climate, tropical plants may not be a suitable decoration.
So this time you decide to do something different. You’ll install giant replica Easter Island heads by Hole Eighteen. You call your landscaper from before, but he tells you he doesn’t do Easter Island heads—you’ll have to talk to someone with a bigger operation.
You get in touch with Global Stonework Megacorp Inc., and they’re only too happy to install the heads. The charge is $6,000 (a little pricier than palm trees, but this is a long-term investment).
Come tax season, you don’t have to worry about sending a 1099 to Global Stonework Megacorp Inc., because they’re a corporation, not an independent contractor.
An example for independent contractors
Suppose you’re a freelance graphic designer, and a local coffee shop called Whole Latte Love, pays you $1,000 to design their new logo.
You do so, and they love it. Come tax season, they send you a Form 1099-MISC, just like they’re supposed to.
Now suppose you don’t hear from Whole Latte Love for a couple years. They eventually come back and want a light design refresh of their logo—”something more minimalist”. You get the changes made in one day, they love it, and you bill them for $450.
In this case, they would not send you a 1099-MISC because you didn’t do $600 of work for them.
How to file a 1099
There are two copies of every Form 1099: Copy A and Copy B.
If you hire an independent contractor, you must report what you pay them on Copy A, and submit it to the IRS. You must report the same information on Copy B, and send it to the contractor.
If you’re an independent contractor and you receive a Form 1099, Copy B from a client, you do not need to send it to the IRS. You report the income listed on Copy B on your personal income tax return.
Form 1099 can be filed online or through the mail. If you want a step-by-step breakdown of how to do the actual filing, check out our article How (and When) to File a Form 1099.
Form 1099 filing deadlines
In general, both Copy A and Copy B of Form 1099-MISC must be submitted by January 31st, 2018 to the IRS and to the contractor, respectively.
One exception: If Box 7 of Form 1099-MISC is empty, you have until February 15th, 2018 to send Copy B to the contractor. However, Copy A must still be submitted to the IRS by January 31st, 2018.