If you’ve never owned a business or been a freelancer, you may only be aware of the 1040 tax forms (and that’s ok). But if you’re just stepping away from the corporate world to claim your stake as a separate entity then it’s time that you understood the ins and outs of other tax forms; specifically the 1099s.
Which brings us to the first question of what is a 1099? In short, 1099 Forms report certain types of income received during the year that must be reported by certain individuals and businesses who deal with said individuals on their taxes. 1099s report income from sources other than wages, salaries, and tips. All in all, there are 20 variants of 1099s, but the most popular is the 1099-MISC.
Anyone who is a self-employed worker or independent contractor (i.e. freelancer or consultant) under federal law is required to submit a 1099 tax form instead of a W-2 when filing taxes. On the flip side, If your business hired the contractor and paid them more than $600 in a calendar year, you’re on the hook for issuing them a 1099-MISC.
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 wouldn’t show up on any 1099s.
Businesses must issue a 1099 form for every non-incorporated contractor paid more than $600 in the calendar year. If employees are reimbursed for their expenses and company policy doesn’t require receipts, a 1099 must be issued if the year’s total reimbursements exceed $600.
There are some exemptions to filing 1099s for certain businesses though. Corporations and LLCs that operate as S-corporations or C-corporations are exempt from filing 1099 forms (except for accounting for their attorney fees). Likewise, payment to those who are selling merchandise, storage, freight, telephones, telegrams, or the like do not require 1099 forms.
Even though most companies that use independent contractors use 1099-MISC tax forms when they file, this tax year is a little different. For 2020 filing, the IRS has made some changes to the 1099-NEC tax form that many businesses should take notice on in order to maintain compliance and not get hit with hefty fees.
If your business is a LLC sole proprietorship working with independent contractors, janitorial services, third-party accounts to receive services that are not physical products, you will need to send out a 1099-NEC form to these non-payrolled entities. Here are a few other key instances where the IRS would require a 1099-NEC from your business:
When preparing to file your taxes this year, it’s imperative that you look over what the IRS requires of you before submitting all of your paperwork. If you plan to file electronically, make sure that your accounting software is up-to-date with the latest 1099-NEC filing form. With everything that is going on in 2020 plus the changes outlined with the 1099 forms, it’s easy to miss a step and pay for it dearly in the end. As employers will no longer be reporting the compensation required for the new 1099-NEC form on the Form 1099-MISC, it’s important to become familiar with these changes now before you get too close to the deadline.
A large business is likely to be established enough to pay costs of an in-house CFO (more than any of the alternatives listed above!). Still, a fractional CFO may be helpful to add to the team in times of transition or growth.