If you’re getting started as a freelancer or your small business is contracting outside help, you’ve probably heard of IRS Form 1099.
For the 2020 tax year, the IRS has a new information return – Form 1099-NEC – and with it, a new filing requirement. Traditionally, businesses have used one form – Form 1099-MISC – to report payments made to nonemployees. But what is it, exactly? And how do you file it? Here’s everything you need to know.
What is a 1099 tax form?
1099-NEC is the version of Form 1099 you use to tell the Internal Revenue Service whenever you’ve paid an independent contractor (or another self-employed person) $600 or more in compensation. (That’s $600 or more over the course of the entire year.) The IRS uses this information to independently verify your income, and therefore your federal income tax levels.
If you’re an independent contractor, it’s not your job to file the 1099-NEC. But if you don’t receive a copy of the 1099-NEC from your client, you should follow up with them. Independent contractors will need to report all their income on Schedule C, even if it falls under the $600 range which wouldn’t show up on any 1099s.
Common examples of nonemployees are independent contractors or attorneys you pay for their legal services.
Generally, you’re required to file a Form 1099-NEC if you meet the following conditions:
- You paid someone who’s not your employee
- You paid for services in the course of your trade or business
- You paid an individual, partnership, estate, or corporation (in some cases)
- You paid at least $600 to the payee during the year
How to file a 1099 form
There are two copies of Form 1099: Copy A and Copy B.
If you hire an independent contractor, you must report what you pay them on Copy A, and submit it to the IRS. You must report the same information on Copy B, and send it to the contractor.
If you’re an independent contractor and you receive a Form 1099, Copy B from a client, you do not need to send it to the IRS. You report the income listed on Copy B on your personal income tax return.
Steps to fill the form:
1. Gather the required information
Before you can complete and submit 1099, you’ll need to have the following information on hand for each independent contractor:
- The total amount you paid them during the tax year
- Their legal name
- Their address
- Their taxpayer identification number (likely their Social Security Number, unless they’re a Non-Resident or Resident Alien)
2. Submit Copy A to the IRS
Copy A of Form 1099-NEC must be submitted to the IRS by January 31, 2021, regardless of whether you file electronically or by mail.
When you file a physical Form 1099-NEC, you cannot download and submit a printed version of Copy A from the IRS website. Instead, you must obtain a physical Form 1099-NEC, fill out Copy A, and mail it to the IRS.
3. Submit copy B to the independent contractor
Once your Form 1099-NEC is complete, send Copy B to all of your independent contractors no later than January 31, 2021.
4. Submit form 1096
If you file a physical copy of Form 1099-NEC, Copy A to the IRS, you also need to complete and file Form 1096.
The IRS uses Form 1096 to track every physical 1099 you are filing for the year.
The deadline for Form 1096 is January 31, 2021.
5. Check if you need to submit 1099 forms with your state
Depending on where your business is based, you may also have to file 1099 forms with the state. Check-in with your CPA and ensure you’re compliant with your state’s 1099 filing requirements.
How to file 1099s online
You can e-file Copy A of Form 1099-NEC through the IRS Filing a Return Electronically (FIRE) system. This form must be produced with the help of compatible accounting software.
Before using FIRE, you need a Transmitter Control Code (TCC). You can request a TCC by filling out Form 4419 and then mailing or faxing it to the IRS. This form must be submitted at least 30 days before the tax deadline for your Form 1099-NEC.
Once the IRS contacts you with your TCC, you may use it to create an account with FIRE.
You can email Copy B to your contractor, but first, you need their consent to do so.
Consent should be obtained in a way that proves the contractor can receive the form electronically. If you’re planning to email them a copy, you should contact them via email to obtain consent.
To comply with IRS rules, your request for consent must include the following:
- Affirmation of the fact that, if the recipient does not consent to receive an electronic copy, they will receive a paper one.
- The scope and duration of their consent. For instance, are they agreeing to receive an electronic copy this year, or every calendar year they work for you?
- How to request a paper copy from you, even if they have given consent to receive an electronic one.
- Instructions on how to withdraw consent. They may withdraw consent at any time in writing, electronically or on paper. You must also confirm their withdrawal in writing.
- Under what conditions the statement may no longer be provided—for example, if the contractor’s contract is canceled, or if you end up paying them less than $600 for their services.
- The procedure they need to follow to update their information with you.
- A description of the hardware and software they need to view and print the form.
- A date on which the form will not be available. For example, if you are making it available to download via your company’s website, you must tell them at what point in time the form will be removed from your servers.
Once you’ve received consent from the contractor, you are free to send them their Copy B electronically.
Some services can make this process less labor-intensive. (Gusto, for example, automatically requests electronic filing consent from all of your contractors.)
What happens if you miss the 1099 filing deadline?
Missing the deadline is not the end of the world, but you will have to pay the following IRS penalties for each late 1099 form:
- $50 if you file within 30 days
- $100 if you file more than 30 days late, but before August 1
- $260 if you file on or after August 1
If you intentionally fail to file, you may be subject to a minimum penalty of $530 per statement, with no maximum.
The amount of the penalty is based on when you file the correct information return. If you aren’t able to file on time, you can request an extension using IRS Form 8809. But this does not extend the January 31, 2021 deadline for submitting a copy of the 1099 to independent contractors.