Sometimes hiring new employees is not advantageous for your small business. That’s when hiring freelancers, contractors, and vendors can help you maintain growth and operations. As you are getting ready for a new tax season, it’s essential to know how to fill out 1099-NEC forms and who is supposed to get one.
What is a 1099 form?
An IRS Form 1099 reports the income individuals earned over the course of the year. You are familiar with the W-2 form that reports how much a person got in wages the previous year. 1099 forms report all other types of income. Banks offer a 1099-DIV form to those who earned dividends. Companies issue a 1099-CAP form to shareholders who received stock, cash, or other property.
However, the most common 1099 forms are issued to independent contractors, sole proprietors, freelancers, and self-employed individuals. Since 2020, businesses are required by the IRS to complete a 1099-NEC form for non-employee compensation. A 1099-MISC form is still used to report rent payment or attorney fees that exceed $600 per tax year.
Who should file a 1099-NEC form?
By law, businesses should issue a Form 1099-NEC to relevant freelancers, independent contractors, and vendors by January 31. The forms should also be filed with the IRS by this date each year. To file a 1099-NEC you will need a taxpayer identification number for each vendor, freelancer, or contractor. This may be their social security number, an individual taxpayer ID number, or an employer ID number.
To obtain a taxpayer ID number, each freelancer, vendor, or contractor will need to file out a W-9 form. They should do this when they first begin working with your business. Then you will just need to track the payments you make to them throughout the year.
Exceptions to a 1099-NEC Form
Your business will need to issue a 1099-NEC form to freelancers, vendors, and contractors. However, there are a few exceptions such as:
- If you paid a vendor less than $600 over the course of the year
- When the vendor is a C corp.
- If you use a third-party network (like PayPal) they will process a report and you don’t need to.
- Reimbursement processors (Gusto, Justworks, Expensify) will file 1099-NEC forms for you.
1099 Forms Best Practices
As tax season approaches, figuring out who does and does not get a 1099 form, issuing W-9 forms, and keeping track of everything can be complicated. Here are a few tips to help.
- Request a W-9 form as soon as you start working with an individual.
- Review all bank accounts and other tools like cash, check, EFT, direct deposit payments for all vendors, freelancers, and contractors that you pay at least $600 for a tax year.
- It’s better to send a 1099-NEC that was not needed than to fail to send one.
- After you have a list of all your potential 1099 vendors, freelancers, and contractors, and how much you’ve paid each of them, share it with your tax preparer. They can file the 1099-NEC for you.