Freelancers make the startup world go round. Whether it’s a developer who helps to create a website for your company or a copywriter who fills up your blog with content, most startups hire freelancers or independent contractors are some point.
But while freelancers are great, they do make things a little more complicated when it comes to tax time. This especially true when it comes to Form 1099-MISC. If you’re already lost, don’t worry. We’ll cover the basics of Form 1099-MISC including what it is, when you need one, and why they’re necessary to keep your finances squeaky clean.
What is Form 1099-MISC?
Though it may not have a very sexy name, Form 1099-MISC is very important for freelancers and independent contractors. While Form W-2 is given to employees, Form 1099-MISC is given to all non-employees. Understood in the simplest terms, Form 1099-MISC is an IRS form that is used to report non-employee compensation. This refers to the payments that freelancers, independent contractors, sole-proprietors, etc., receive from each client who paid them more than $600 in a calendar year.
The information included on Form 1099-MISC includes non-employee compensation, as well as federal and state income taxes withheld. It also includes medical and healthcare payments.
Freelancers and other non-employees need a copy of this information to report on the income earned on their personal or business federal and state income tax returns. The form is also necessary for IRS for verification purposes.
Who needs Form 1099-MISC?
In short, From 1099-MISC must be given to any non-employee, who has been paid more than $600 in business payments for their services. Though there are a number of other cases where Form 1099-MISC is needed, the most common reasons startups would need to issue the form is when using the services of non-employees (Box 7). The IRS considers non-employee compensation as meeting the following criteria:
- Payments were made to someone who is not your employee
- Payments were made for services in the course of your trade or business
- You made payments to an individual, partnership, estate, or (in some cases) a corporation
- You made payments to the non-employee of at least $600 during the year
It’s important to note that Form 1099-MISC is only necessary when the payments are made in the course of running a business. Therefore, it does not pertain to personal payments. However, the person you paid, and to whom you owe a 1099-MISC, does not necessarily have to be a business. Form 1099-MISC is still required if you hire an individual who is self-employed, or someone who does not file business taxes on a separate business tax form.
TIP: If you’re ever in doubt whether someone you hired should be issued a 1099-MISC form, complete the form anyway. If the form is required and you fail to fill it out, you could face fines and penalties from the IRS.
Are there exemptions to Form 1099-MISC?
There are a number of general exemptions to Form 1099-MISC, including:
- Corporations, including LLCs, treated as an S corporation or C corporation
- Merchandise, telegrams, telephone, freight, storage, and similar items
- Rent to rental agents
- Payments of wages/salaries to employees, and payments for business travel to employees
When is Form 1099-MISC due?
Form 1099-MISC must be provided to non-employees (by mail or online) no later than January 31st. However, it is recommended to give this form to non-employees earlier in January. This will give them time to review the form and make any necessary corrections.
How do I prepare and file Form 1099-MISC?
When preparing 1099-MISC forms, it’s important to note that two copies are needed. You need to provide Copy A to the IRS and Copy B to the recipient.
To prepare 1099-MISC forms, you’ll need to obtain copies from an office supply store, your payroll service/payroll software program, business tax program, or directly from the IRS. While a copy of Form 1099-MISC appears on the IRS website in red, this is for IRS use only—it’s not available for download and print.
Note that along with Copy A of all the 1099-MISC forms you provide to non-employees, you must also submit Form 1096 transmittal form to the IRS if you are mailing your forms to the IRS. You do not need to submit Form 1096 if you e-file the 1099 forms.
Once you have the correct forms, you need to have a couple of things on hand. Make sure you know the total amount of payment for the person, their taxpayer ID number, and address. In order to get the person’s taxpayer ID, you will need to first get a W-9 form from that person. In the case that your business is audited, you will need to be able to show proof of a W-9 form for everyone who did work for you.
Once you have filled out the forms, you can submit Copy A of Form 1099-MISC (along with the transmittal form 1096 if you are mailing) to the IRS by mail or online. Copy B should be submitted to the recipient (the non-employee whose services you used).
What are the consequences of not filing Form 1099-MISC?
If you use the services of a non-employee and do not file Form 1099-MISC, you could be fined $100 for each type of form (with no maximum). If you miss the January 31st deadline and file late, the fines are determined based on how late you file, as well as the size of your business.
While 1099-MISC forms can be a pain, they are important in order to keep your finances in order and your business compliant. Of course, you can always save yourself the pain of handling the books on your own by outsourcing your bookkeeping.