If you’re getting started as a freelancer or your small business is contracting outside help, you’ve probably heard of IRS Form 1099. But what is it, exactly? And how do you file it? Here’s everything you need to know.
What is a 1099 tax form?
A 1099 is an “information filing form”, used to report non-salary income to the IRS for federal tax purposes. There are 20 variants of 1099s, but the most popular is the 1099-MISC. If you paid an independent contractor more than $600 in a financial year, you’ll need to complete a 1099-MISC.
An individual can also make money from tax dividends, prize winnings, interest income, IRA distributions, state tax refunds, miscellaneous government payments, the sale of personal property, or even credit card debt forgiveness. These types of income are reported on other types of Form 1099, which you can read all about here.
If you’re a small business owner, you’ll most often be dealing with Form 1099-MISC, so we’ll focus on that one.
Form 1099-MISC, Copy A
What is a 1099-MISC Form?
1099-MISC is the version of Form 1099 you use to tell the Internal Revenue Service whenever you’ve paid an independent contractor (or other self-employed person) $600 or more in fees, compensation, real estate rent, prizes, awards, or any other kind of taxable income. (That’s $600 or more over the course of the entire year.) The IRS uses this information to independently verify your income, and therefore your federal income tax levels.
If you’re an independent contractor, it’s not your job to file the 1099-MISC. But if you don’t receive a copy of the 1099-MISC from your client, you should follow up with them. Independent contractors will need to report all their income on Schedule C, even if it falls under the $600 range and there wouldn’t show up on any 1099s.
Independent contractor definition
An independent contractor is anyone you hire on a contract basis to complete a particular project or assignment. By definition, an independent contractor is not an employee. Common examples include graphic designers, web developers, copywriters, and social media consultants.
If you hire a freelancer through a third-party service, you may not be required to submit a 1099 for them. For instance, if you hire a freelancer through Upwork, Upwork is actually the one doing the hiring, so you don’t need to submit a 1099.
These details vary from one third-party hiring service to another. Check out the company’s “About” or “FAQ” section for tax filing details before you start using their service.
Who gets a 1099?
All contractors and partnerships who did more than $600 of work for your business should receive a 1099.
Who needs to fill out a 1099 form?
If your business hired the contractor and paid them more than $600 in a year, you’re responsible for issuing them a 1099-MISC. In other words, the payer fills out the 1099.
The $600 cut-off
If you paid an independent contractor less than $600 over the course of the financial year, you don’t need to submit Form 1099-MISC for them.
Keep in mind that if you’re an independent contractor, 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.
If you did pay a contractor more than $600 for services, rent, or for any other type of miscellaneous income payment, you need to file a 1099. But there are exceptions to this rule.
Don’t file 1099s for corporations
It’s rare, but sometimes an independent contractor will be registered as a C corporation or S corporation. You don’t need to file Form 1099 for a contractor registered as a corporation.
You can see whether a contractor is incorporated based on the information on their Form W-9. Request one from any contractor as soon as you hire them. Also keep in mind that corporation names are typically appended with “, inc.”
Don’t file 1099s for employees
The IRS makes strict distinctions between employees and nonemployees. And they’re often on the lookout for business owners who misclassify workers as independent contractors (typically in order to avoid paying social security and medicare taxes.)
You’ll need to file a Form W-2 to report wages, tips, and other compensation you paid to an employee during the tax year.
There are significant penalties for misclassifying employees as independent contractors. Make sure you know how to tell the difference between an independent contractor and an employee before you submit a 1099.
Do partnerships get a 1099?
If you paid a partnership more than $600 during the tax year, then you must issue them a 1099-MISC.
1099 example for small business owners
Let’s say 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 the eighteenth hole.
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.
Now let’s say 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.
You decide that you want giant replica Easter Island heads by the eighteenth hole instead. 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).
You don’t have to worry about sending a 1099 to Global Stonework Megacorp Inc., because they’re a corporation, not an independent contractor.
1099 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 the work, 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. However, you’ll still need to report that $450 income on your tax return, and pay self-employment and income tax on it.
How to file a 1099 form
There are two copies of 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-MISC, Copy B (This is the one you send to your contractors.)
1. Gather the required information
Before you can complete and submit a 1099, you’ll need to have the following information on hand for each independent contractor:
- The total amount you paid them during the tax year
- Their legal name
- Their address
- Their taxpayer identification number (likely their Social Security Number, unless they’re a Non-Resident or Resident Alien)
The standard method for acquiring this information is to have each contractor fill out a Form W-9. As a best practice, you should have a W-9 on file for each of your independent contractors. Having contractors fill out a W-9 should be one of the first administrative tasks you complete after engaging their services.
Check your bookkeeping records to confirm the total amounts you paid to each contractor during the tax year.
Once you have all of the required information, use it to fill out Form 1099-MISC.
2. Submit Copy A to the IRS
Copy A of Form 1099-MISC must be submitted to the IRS by January 31, 2020, regardless of whether you file electronically or by mail.
When you file a physical Form 1099-MISC, you cannot download and submit a printed version of Copy A from the IRS website. Instead, you must obtain a physical Form 1099-MISC, fill out Copy A, and mail it to the IRS.
3. Submit copy B to the independent contractor
Once your Form 1099-MISC is complete, send Copy B to all of your independent contractors no later than January 31, 2020.
4. Submit form 1096
If you file a physical copy of Form 1099-MISC, Copy A to the IRS, you also need to complete and file Form 1096.
The IRS uses Form 1096 to track every physical 1099 you are filing for the year.
The deadline for Form 1096 is January 31, 2020.
5. Check if you need to submit 1099 forms with your state
Depending on where your business is based, you may also have to file 1099 forms with the state. Check in with your CPA and ensure you’re compliant with your state’s 1099 filing requirements.
How to file 1099s online
You can e-file Copy A of Form 1099-MISC through the IRS Filing a Return Electronically (FIRE) system. This form must be produced with the help of compatible accounting software.
Before using FIRE, you need a Transmitter Control Code (TCC). You can request a TCC by filling out Form 4419 and then mailing or faxing it to the IRS. This form must be submitted at least 30 days before the tax deadline for your Form 1099-MISC.
Once the IRS contacts you with your TCC, you may use it to create an account with FIRE.
You can email Copy B to your contractor, but first you need their consent to do so.
Consent should be obtained in a way that proves the contractor can receive the form electronically. If you’re planning to email them a copy, you should contact them via email to obtain consent.
To comply with IRS rules, your request for consent must include the following:
- Affirmation of the fact that, if the recipient does not consent to receiving an electronic copy, they will receive a paper one.
- The scope and duration of their consent. For instance, are they agreeing to receive an electronic copy this year, or every calendar year they work for you?
- How to request a paper copy from you, even if they have given consent to receive an electronic one.
- Instructions on how to withdraw consent. They may withdraw consent at any time in writing, electronically or on paper. You must also confirm their withdrawal in writing.
- Under what conditions the statement may no longer be provided—for example, if the contractor’s contract is cancelled, or if you end up paying them less than $600 for their services.
- The procedure they need to follow to update their information with you.
- A description of the hardware and software they need to view and print the form.
- A date at which the form will not be available. For example, if you are making it available to download via your company’s website, you must tell them at what point in time the form will be removed from your servers.
Once you’ve received consent from the contractor, you are free to send them their Copy B electronically.
Some services can make this process less labor intensive. (Gusto, for example, automatically requests electronic filing consent from all of your contractors.)
When are 1099s due? (2020 deadlines)
The deadline to file Copy A with the IRS is January 31, 2020, if you’re reporting payments in box 7.
Otherwise, the deadline is February 28, 2020 if you file on paper, and March 31, 2020 if you file electronically.
The deadline for sending Copy B of Form 1099 to your contractors is January 31, 2020.
The due date is extended to February 18, 2020 if you’re reporting payments in box 8 or 14 of 1099-MISC.
What if you don’t receive a 1099 from a business?
If you’re a contractor, it’s your client’s responsibility to send you a completed copy of the Form 1099-MISC by January 31, 2020.
If you haven’t received Copy B of a 1099 from your client by the deadline, and you believe you should have, make sure you request it. You will need it to file your income taxes in April.
Regardless of whether you receive a Form 1099-MISC, you must report all income earned on your tax return.
What happens if you miss the 1099 filing deadline?
Missing the deadline is not the end of the world, but you will have to pay the following IRS penalties for each late 1099 form:
- $50 if you file within 30 days
- $100 if you file more than 30 days late, but before August 1
- $260 if you file on or after August 1
If you intentionally fail to file, you may be subject to a minimum penalty of $530 per statement, with no maximum.
The amount of the penalty is based on when you file the correct information return. If you aren’t able to file on time, you can request an extension using IRS Form 8809. But this does not extend the January 31, 2020 deadline for submitting a copy of the 1099 to independent contractors.