Many freelancers and independent contractors often have to guess many things about the form 1099s despite these being their most important data source for their tax returns.
The penalties from 1099 form mishaps can add up quickly or land you into serious trouble with the IRS. Therefore, it is essential to understand these forms, starting with who receives them and when an independent contractor should expect one.
That said, this guide explains the requirements for receiving a 1099 form and the exceptions. But, first, it is essential to know precisely what these forms are.
What are 1099 Forms?
The 1099 form is one of the many tax forms the Internal Revenue Service provides for reporting income payments to prepare and file taxes. These forms report non-employee compensations for freelancers and independent contractors.
Freelancers and independent contractors do not need to include the 1099 form when they pay taxes, as only the amount of income reported in the form is required. Therefore, provided you know the amount of income you received in the tax year, you can still file taxes, without a 1099 misc form.
There are different 1099 form types, but the 1099-NEC and 1099-MISC are the most common ones. 1099-NEC is used to report non-employee compensation, while IRS form 1099-MISC reports the miscellaneous income payments.
Other types are the 1099-INT for reporting interest income, 1099-DIV for reporting cash payments for dividends, 1099-R for pensions and payouts from IRS and 1099-S for that you use to report payments for real estate transactions. There is also a 1099-G form for reporting state and local tax refunds and unemployment benefits.
Who Should Recieve a 1099 Form?
A 1099 form is required to report certain non-employee compensations for services performed. It includes everything from earnings for independent contractors to rents, prizes and awards.
Here is an overview of who should receive a 1099 form.
1. Independent contractor or freelancer
One of the criteria for determining who receives 1099 is the working relationship between the employers and workers. 1099 forms are used to report income for non-employees such as freelancers and independent contractors.
Many business owners will sometimes find it difficult to differentiate between employees and freelancers. In general, you are dealing with an employee if you have control over what work is done, how the worker does it, provide equipment for doing the job and give the worker benefits like health insurance.
If the worker controls how the work is done and works with many clients, they are independent contractors. Therefore, you have to send them a 1099 form for payments over $600.
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2. Non-corporation business structure
Another criterion to keep in mind is the business structure. If you are working with a freelance or contractor registered as a corporation, you will not need to send 1099-MISC or any other 1099 form.
However, if you are dealing with limited liability companies (LLCs) and partnerships, you still have to send the 1099 forms provided the payments meet other conditions like the $600 minimum payment. It should be easy to determine the business structure by requesting W-9 forms before making payments.
3. $600 or more earnings
Freelancers engaging in independent contracting jobs have to pay self-employment taxes provided the income for the tax year exceeds $400. However, you will only receive a 1099 form if your miscellaneous income is at least $600 or more.
According to the IRS guidelines, any payments for rents, prizes and awards, health care payments and attorney payments made for at least $600 require a form 1099.
4. $10 earning in royalties
Any earnings over $10 that you get for royalties, tax-exempt interest or interest earnings from financial institutions like banks and broker payments will also require a report on a form 1099. Hence, if you receive any of these payments, you should expect a 1099 form for use in the tax season.
5. Paying more than $20K via third-party apps
Third-party payment apps like Venmo and Paypal will also issue a 1099 form for (the 1099-K) any payments over $20,000 they process within the tax year. For the 2024 tax year, this number will change from $20,000 to $5,000.
Other financial institutions like debit and credit card processing merchants will also issue the 1099-K form instead of 1099-NEC like a regular business owner. However, both form types serve the same purpose: to report payments for the tax year.
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What If You do Not Receive the 1099 Form?
It is possible not to receive a 1099 tax form from some clients, whether they forgot or didn't know they were obligated to send one.
Although the forms are not mandatory to report payments to the IRS, it is essential to contact the clients and ask them to send the forms as this will give you an easier time determining your taxable income.
If you keep proper records of all your cash paid and expenditure, you should not have any problems even if you do not receive the forms. However, it is essential to remember that the IRS also gets a copy from the clients, and so what you file for your tax return needs to match what they have in their records.
Taxpayers that end up filing a lower income than because they did not get the 1099 form can be flagged for an IRS tax audit and get fined. Therefore, whether you receive the form 1099 or not, the most important thing is to ensure you get your numbers right.
General Exceptions for Sending/Receiving 1099 Forms
In some situations, the IRS provides exemptions from sending the 1099 form, and freelancers should not expect to get them. Here are a few of these exceptions that you need to know.
1. Payments to corporations
Any payments made to corporations are exempted from sending form 1099-MISC or any other types. The exemption also includes payments to LLCs and partnerships that choose to be treated as S or C corporations.
However, it is essential to note that this exemption will not include payments to a law firm for legal services regardless of the business structure, provided they are $600 or more.
2. Rent payments through real estate agents
Although rent payments to landlords over $600 require a 1099 form, you should not expect one if you pay the rent through a real estate agent or a property manager. IRS Schedule E or form 1040 is used to report payments made to real estate agents/property managers.
3. Payment to tax-exempt organizations
Since tax-exempt organizations do not pay taxes, the 1099 forms are unnecessary. However, it is essential to make sure teh organization you are dealing with qualifies to be tax-exempt.
The IRS requires tax-exempt organizations to be organized and registered to do charitable, religious and scientific work. Organizations registered exclusively for public safety purposes also qualify.
4. Business payments for certain services and goods
You will not need to issue a 1099 form when paying for certain services and goods that you need to run your business. They include buying business merchandise, freight payments, storage telephone services, or similar items.
5. Wage or salary payments
Any payments you make for employee wages and salaries will not require form 1099. These payments include things like travel expenses and paid vacations.
Given tax management differences, it is crucial to differentiate employees from independent contractors and freelancers. The IRS provides clear guidelines on how to determine the two worker types.
Steps that Businesses Should take When Issues Form 1099
Before you can issue any 1099 form, the first step is to request a W-9 form from the business or freelancer you want to pay.
The W-9 form captures all the vital information, such as mailing addresses and taxpayer ID numbers, hence saving you the frustration of not having all the details when filling out the form 1099-MISC.
Another step is ordering the forms from the IRS and picking them up from a service center. The IRS pre-prints the forms in triplicate, so you cannot just download them from their website.
You will also need to reconcile other income payments for the particular freelancer or business to ensure you do not live out anything before sending the forms.
Where and When to File 1099 Forms
Clients must prepare and send the 1099 form for all the qualified freelances by January 31. Also, you must submit the forms together with other like 1096 forms to the IRS by the same deadline.
If the deadline day does not fall on a business day, the IRS extends the next business day. For example, if January 31 falls on a Sunday, you will have until Monday, February 1, to send the forms.
The deadlines for local and state filing may vary, but most go with IRS deadlines. Moreover, if you have more than 250 ‘1099 forms’, you have to file them electronically. The IRS FIRE (File Electronic Returns Electronically) system will make electronic tax filing quick and easy.
Keeping track of 1099s is vital for freelancers or non-employees and businesses that deal with these worker types a lot. These forms provide crucial information on the income you owe, so you have an easy time filing your tax return. You can still file taxes even if you do not get the forms, but it is essential to make sure you do not underestimate your taxable income.
IRS regulations require you to match the income you report with the information they already have. It is better to overestimate your taxes as you can always ask for a tax refund. Indy makes it simple for you to keep your invoices in one place so that tax season is easier to manage. Generate an invoice template with just a click, add your line items, send it off, and get paid fast. It's as simple as that! Get started today with Indy.