As a business accounting firm, the end of the year means questions begin to roll in from business owners regarding tax forms for independent contractors and how 1099s affect business tax planning.
- Do I need to file a 1099?
- What is a 1099-NEC vs 1099-MISC?
- Do all independent contractors get 1099s?
- What are the different kinds of 1099 forms for independent contractors, and how do I know which one to use?
- How does an independent contractor pay taxes?
- What if I get a 1099?
This article seeks to answer these questions and help business owners feel more comfortable as they work with independent contractors and third-party payment networks.
The basic premise behind all 1099 forms is to report non-employee income to the IRS. As a business owner, you’ll most often see one of three forms, depending on the situation: the 1099-NEC, the 1099-MISC, or the 1099-K.
What is a 1099-NEC?
Form 1099-NEC is relatively new and came about in response to the rapid rise of the gig economy and the explosion of workers choosing to operate as independent contractors. 1099 NEC forms are used to report non-employee compensation for freelancers/gig workers/independent contractors that you pay throughout the year. Prior to 2020, if you were paying an independent contractor, you reported it on Form 1099-MISC, box 7, non-employee compensation.
When should you use it? The 1099-NEC instructions state that business owners must issue this form if the following conditions are met:
- You make a payment to a person who is not your employee.
- Payment is made for services rendered to your trade or business.
- Payment is made to an individual, partnership, estate, or in some cases a corporation.
- Payment total exceeds $600 for the year via cash or check.
Your first responsibility will be to determine if the person in question really is an independent contractor. The independent contractor definition is constantly changing but it typically comes down to looking at how much control the person has over their day. Our accounting and business services team suggests owners stay in the loop on newly proposed rules that could reclassify many independent contractors to employees to make sure you stay in compliance.
Understanding 1099-MISC instructions
The 1099-MISC form is used to report payments other than non-employee compensation made by a trade or business to others.
When should you use form 1099-MISC? Issue this form to each person you have paid throughout the year if payment meets one of the following conditions, according to the IRS:
- At least $10 in royalties or broker payments instead of dividends or tax-exempt interest.
- At least $600 in:
- Rents.
- Prizes and awards.
- Other income payments.
- Medical and health care payments.
- Crop insurance proceeds.
- Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish.
- Generally, the cash paid from a notional principal contract to an individual, partnership, or estate.
- Payments to an attorney.
- Any fishing boat proceeds.
- In addition, use Form 1099-MISC to report that you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.
What is a 1099-K?
Receiving Form 1099-K used to be rare, but the rules have changed as a part of the American Rescue Plan Act of 2021. In 2023, our full-service accounting firm expects to see more of this gig worker tax form than ever before.
Form 1099-K is an IRS information return that reports the annual gross amount of all reportable payment transactions made through a payment card or third-party payment network. The American Rescue Plan Act of 2021 1099-K changes lowered the threshold from $20,000 to just $600 per year, which will lead to significantly more filings.
Payment cards include credit, debit, gift, and prepaid cards. Third-party payment networks are platforms that process payments (i.e., PayPal and Venmo), connect independent sellers with customers (i.e., eBay and Etsy), and those used to connect gig workers with consumers (i.e., Uber, Fiverr, and UpWork).
Therefore, if you made payments to independent contractors in excess of $600 via third-party services such as PayPal or credit card companies, the third party takes on the filing responsibility, and you can exclude these payments from your own filing.
As a retailer or business owner, if you accept payments this way, for the calendar year 2022, you can expect to receive a 1099-K for activity that meets the following requirements:
- From all payment card transactions (e.g., debit, credit, or stored-value cards)
- In settlement of third-party payment network transactions totaling $600 or more (any number of transactions)
The new law clarifies that only third-party network transactions made for the purchase of goods and services are subject to reporting.
Deadline to file
Don’t forget to add filing your 1099s as part of your business tax preparation checklist. The deadline for filing 1099s is January 31 and failure to file your 1099s by the deadline will result in financial penalties from the IRS. Note that if the 31st happens to fall on a weekend, the deadline will be the next business day.
Should you have any additional questions on 1099s, our professional accounting and tax services can clarify your concerns. Please reach out to your BGW CPA team.
