If you’re a small business owner that has worked with contractors, you may wonder if you’re responsible for filing a 1099 tax form. There are several variables and different types of 1099 forms, so it’s not an easy question to answer.
The IRS doesn’t make things entirely easy to understand, so the 1099 form can seem rather complicated. It’s not all that complicated though, and we’re going to provide you with an explanation of the 1099 form, and case scenarios where you are (or aren’t) responsible for filing one for contractors you’ve worked with.
Explanation of the 1099 form
The 1099 form is an information filing form which is used to report non-salary income to the IRS, for federal tax purposes. There are actually 20 different 1099 forms, but the most commonly used is the 1099-NEC for reporting contractor payments.
Previously the 1099-MISC was for reporting contractor payments, but the IRS released the new 1099-NEC in 2020. However, the 1099-MISC still has uses, as it is used for reporting payments to an individual or LLC in excess of $600, legal settlements, or prize or award winnings. You can use this useful form to determine whether or not you need to send a 1099-NEC / MISC form for any independent contractor you’ve worked with.
So for small business owners who have dealt with contractors over the business year, the 1099-NEC is the form you will most likely be using, but you can read about the 1099 forms here.
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It’s worth remembering that form 1099-NEC does not entirely replace 1099-MISC. 1099-NEC is only replacing the usage of 1099-MISC as a way of reporting payments made to independent contractors.
Example of Form 1099 for Small Business Owners
If you’re a small restaurant owner for example, you may hire a local contractor to do renovations and interior repair. The contractor comes in and completes the job, and they operate as a sole proprietorship, charging you $5,000 for the completed job.
So in this example, it would be your responsibility to send the contractor a Form 1099-NEC, stating the exact amount paid to the contractor, and the services rendered to you. You will also file a copy to the IRS.
You will be using the 1099-NEC form because the contractor charged you more than $600 for the job. The IRS will use the information to verify the contractor’s income and federal income tax levels.
It is not the contractor’s responsibility to file the 1099-NEC for you, only to report all of their income on Schedule C. The contractor will use the 1099-NEC provided by you while filing their own personal tax returns.
In other words, you as a small business owner are filing the 1099-NEC to the IRS for verification of payments you made to the independent contractor, and providing a copy of the form to the independent contractor for their personal tax filing.
What defines an independent contractor?
An independent contractor is anyone you hire on a contract basis. Therefore, an independent contractor is not an employee.
If your business uses the services of online freelancers, you may or may not be required to file a 1099 form for them as well. It really depends on several factors, such as whether you contracted the freelancer through a freelancing platform such as Upwork.
Upwork is actually the one “hiring” the freelancer, so Upwork would be responsible for providing the 1099 form to the freelancer (and the IRS).