It is not a misconception that taxes are confusing, quite often tedious, and certainly very frustrating. There are so many forms to fill out, so how does an individual or a company know which one applies? And if the wrong one is filled out, what negative consequences can be applied? Even when filling out the proper tax form, any inaccurate information can be penalized by the government. It is, quite frankly, a lot to think about and remarkably high stakes.
It is too much of a risk, it is essential to have some idea of what is being filed and why. The 1099 form is a significant format that should be applied when dealing with third parties. These forms should be kept in mind as an employer since they have to be provided if the service is worth $600 or more. The service provider needs this information themselves since it is essential for their own tax forms.
What is 1099?
Though common knowledge for some, the 1099 form itself can be confusing for those who encounter its details for the first time. Firstly a 1099 tax form is an information filling form used to report non-salary income to the IRS government offices for federal tax purposes. 20, 1099 tax form variations exist, secondly the most popular being the 1099-NEC; this one applies to third party hires. This document is essential for any of the following examples.
- Someone who is not an employee but who does provide a service.
- A payment made for use to a company or entity.
- Includes individuals, partnerships, or other companies.
- The amount must be $600 or more for the year.
1099 for an Employee?
First, no, 1099 isn’t for employees. In accounting or bookkeeping terminology, the 1099 form reports independent contractors' gains and how much they can make during the year. Second, no, an independent contractor by definition is not an employee and, as such, uses the appropriate 1099 form suited for contractors. As an employer who takes on a third-party service, if you have spent 600 dollars or over the course of a year, the company has to provide the service provider with the required documentation to present the IRS with their earnings.
The IRS has established this as the threshold for an independent contractor to be eligible for 1099. Then as of this figure, anyone who made more than $600 worth in a calendar year of work is eligible to receive a 1099 form.
Who is an independent contractor?
Anyone who can be hired on a specific contract basis to fulfill an assignment or a project is considered an Independent Contractor in the eyes of the IRS. These include accountants, CPAs, doctors, dentists, real estate agents, bookkeepers, lawyers, writers, graphic designers, programmers, personal protection, web page designers, even groups like cleaning companies. These are individuals or small companies that work for themselves and, as such, fall under the definition of an independent contractor.
Should you hire independent contractors?
Tax forms should not be a deterrent from hiring excellent professionals; there is a lot of help found in the workplace and should not be missed out on. If anything, the independent contractor is there for a specific purpose and once they are done, they collect their paperwork and move on — something to consider.
Firstly, the employer does not withhold income taxes. Secondly, nor do they Pay FICA taxes or pay premiums for Workers Comp or unemployment insurance.
Freelancers, Upworkers, and other online services
If a company hires through a web page like upwork.com or freelancer.com, they do not have to provide that independent worker with 1099 since they are not the ones doing the hiring. This then includes the 600-dollar threshold since you're paying it to Upwork or Freelancing and not to the independent contractor themselves. It is actually the web page acting as an intermediary that hires them. It falls on the web page to present them with the proper forms.
So, when to use a 1099?
The 1099 form is for independent contractors who work for their own companies. The information can come from various sources as the independent contractor might have multiple clients. An independent contractor might think it a good idea to have a bookkeeper on hand to keep their clientele payments organized. This information will be required when reporting the yearly income gained through their work.
A company that hires an individual for a specific person and spends over $600 in services must provide the contracted with the proper 1099 form so they can use it in their own taxes. Keep this in mind in the following cases:
- When hiring a lawyer, bookkeeper, CPA, public accountant, architect, entertainment.
- Any third-party participant that is bringing a service or a product.
- These include payments for the parts used by the third-party for their service.
So why Form 1099-NEC, and what has changed?
The IRS initially used the form 1099-MISC and made some alterations by including 1099. It basically brought back a paper that had not been in use since 1982 and is now included at the beginning of the next tax season 2020 to 1 February 2021. This new 1099-NEC is used to report the third-party compensation forms.
As an independent contractor, these forms are now the new norm for when filing for tax season. It is never said enough. The risk of filing tax information incorrectly can bring about unintended consequences and, quite frankly, are not worth the pain. If taxes are not your strength, let the team at Hall Accounting know and they can help out. The process of filing taxes correctly the first time more than makes up the trouble of having to deal with a government agency multiple times.
FUTURE IMPORTANT DEADLINES
Deadline for employers to mail out W-2 Forms to their employees and for businesses to furnish 1099 Forms reporting non-employee compensation, bank interest, dividends, and distributions from a retirement plan
Deadline for businesses to mail Forms 1099 and 1096 to the IRS
Deadline for S-Corporate tax returns (Form 1120-S) for tax year 2020, or to request an automatic six-month extension of time to file (Form 7004) for S-Corporations that use the calendar year as their tax year, and for filing Partnership tax returns (Form 1065) or to request an automatic six-month extension of time to file (Form 7004)
Deadline for businesses to e-file Forms 1099 and 1096 to the IRS, except Form 1099-NEC
Deadline to file individual tax returns (Form 1040) for the tax year 2020 or to request an automatic extension (Form 4868) for an extra six months to file your return, and for payment of any tax due, and for Deadline for corporate tax returns (Forms 1120 and 1120-A) for tax year 2020, or to request an automatic six-month extension of time to file (Form 7004) for corporations that use the calendar year as their tax year
Deadline for household employers who paid $2,200 or more in wages in 2020 to file Schedule H for Form 1040
Deadline for first-quarter estimated tax payments for the 2021 tax year
Deadline for second-quarter estimated tax payments for the 2021 tax year
Deadline for third-quarter estimated tax payments for the 2021 tax year
Deadline for S-Corporate tax returns (Form 1120-S) for tax year 2020 for S-Corporations that use the calendar year as their tax year, and for filing Partnership tax returns (Form 1065)
Final extended deadline to file individual tax returns for the year 2020 (Form 1040), and for Deadline for corporate tax returns (Forms 1120 and 1120-A) for tax year 2020 for corporations that use the calendar year as their tax year