This is an excerpt from a guide for Small Business Owners by E-File My Forms. Their website is a low cost and solid resource for electronic filing of 1099 tax forms if you are not utilizing your accounting software or your accountant to prepare your Annual 1099 form filing.
While not a substitute for tax advice from an expert, this guide is designed to help you understand the basics of 1099 reporting for independent contractors to remove the complexity and help you understand your obligations so everyone avoids IRS and state penalties.
As a successful small business owner, you know how useful it can be to hire independent contractors with specific expertise and skills. You can bring them on when you need them with without the commitment or cost of an employee. But, then you have those 1099 forms to contend with.
1099 reporting used to be fairly straightforward, but over the past few years, there have been a number of changes and updates regarding the reporting rules that have many business owners confused. This can lead many business owners to guess on the rules and possibly file incorrectly, or worse just give up and not file at all. This can be a risky move and result in penalties that can add up quickly and unhappy contractors who are not getting the documents they need to file their taxes correctly.
So let’s get right to it and hopefully we can help remove any stress you may have around this process as a small business owner.
Employee vs. Contractor
The first step in this process is to make sure you’ve correctly classified each worker’s status as an employee or an independent contractor. The rules surrounding whether a worker is an employee or independent contractor are certainly complex, and misclassification or bending of the rules to save money could carry a heavy financial risk. Let’s take a look at the IRS’s general definition of an independent contractor. The IRS says, “an individual is an independent contractor if the payor has the right to control or direct only the result of the work, not what will be done and how it will be done.”
The IRS uses Common Law Rules to determine worker status, grouped under three areas: behavioral, financial, and type of relationship. Generally speaking, the more control you have over the worker – and the person’s contributions to the business – the more likely the worker is an employee.
The following general rules don’t cover every item on the IRS list, but they’ll help steer you in the right direction. Workers are most likely independent contractors if they:
- Use their own equipment (laptop, phone, tools) to perform the job
- Work on a temporary basis and are paid “per project”
- Service other clients, often at the same time (look for an individual business license)
- Work at an offsite location (occasional meetings at your business location are OK; working onsite for days and months at a time are not)
- Have the flexibility to set their own hours and schedule
On the other hand, you should classify workers as employees if they:
- Are paid by the week or month
- Obtain training and detailed direction from your business
- Work full time on a regular basis
- Perform most of their job tasks on the premises
- Can be fired at any time (rather than falling under contractual terms)
- Provide services that are an essential part of your day-to-day operations
Generally, if you define the parameters, cost, and location of the work, then the IRS would consider this someone that’s working as an employee. If there’s a mutually agreed negotiation, and your payee is in control over how, where, and when the work takes place, then you’re probably working with an independent contractor. Having a written agreement outlining their particular services makes this completely clear. Be very careful to establish these classifications correctly at the start of your working relationship.
Make Document Collection and Validation Part of Your Vendor Onboarding Process
Always Collect W-9s: Once you have established who is a contractor, it’s very important to make sure that you collect specific information for tax reporting purposes. This includes their Taxpayer Identification Number (TIN). A TIN will generally be a Social Security Number (SSN) or Employer Identification Number (EIN), depending on the contractor. You can make the 1099 filing process much easier on yourself by making sure you collect Form W-9 from every contractor you work, if you anticipate you will pay more than $600. If filled out correctly, this will ensure you have the proper name and TIN combination the IRS requires when filing your 1099-NEC or 1099-MISC tax forms.
TIN Matching: Since we mentioned above how valuable the W-9 is “when filled out correctly” there is another best practice called TIN Matching that we want to mention here. When filing your 1099s your payee/recipient TIN and name must be complete and match what the IRS/SSA has on file. If it doesn’t, your organization may receive a “B Notice” and eventually a penalty notice that could cost you hundreds of dollars in penalties for every name/TIN mismatch (more on B-Notices later).
Mismatches can happen for a variety of reasons – from typos and transposed numbers to unreported name changes with a marriage or divorce. The bigger concern, however, is missing, incomplete, or outright false TINs. You can mitigate any of these challenges and make sure your reporting is correct by doing a TIN match with the IRS before you file to ensure your contractor data is correct.
There are two types of TIN matching offered by the IRS:
- Bulk TIN matching checks many records against the IRS’s database all at one time. The payor uploads .txt files composed of up to 100,000 name/TIN combinations and receives a response from IRS within 24 hours on the status of the uploaded records.
- Interactive TIN matching enables payors to quickly verify that information is correct, usually for individual or small groups of forms. The payor can submit up to 25 name/TIN combinations at a time, and the IRS system responds within seconds.
While bulk TIN matching is useful for checking records just before or during reporting season, interactive TIN matching can be incorporated into your contractor onboarding processes prior to reporting season. With it, you can check for name/TIN consistency in real-time throughout the year and correct errors one at a time rather than getting hit with a load of bulk-matching corrections at the end of the year.
For more information on how eFileMyForms can help you ensure accurate name/TIN records, please visit our 1099 Reporting Services page.
What Form(s) should I File?
When hiring independent contractors, generally you will file a 1099-NEC (Non-Employee Compensation) form. The 1099-NEC is used for self-employed individuals operating a sole proprietorship, single member Limited Liability Company (LCC), Limited Partnership, or Estate. It generally doesn’t apply to C-Corp or S-Corp contractors, sellers of merchandise, freight, storage, or similar items, among a few other exceptions.
The threshold for the 1099-NEC form is a total of $600 paid to the non-employee during the year. This could be across multiple projects or for just one project, but you will need to complete a separate 1099-NEC for each contractor you work with.
The other common form you may be familiar with is the 1099-MISC. While independent contractor payments used to be reported on the 1099-MISC, the IRS introduced the new 1099-NEC form in tax year 2020, changing the title and purpose of Form 1099-MISC from Miscellaneous Income to Miscellaneous Information. Here is how various types of payments would be reported on these two forms:
- 1099-NEC. Businesses will now file Form 1099-NEC for each person to whom they paid at least $600 during the year. This payment would have been for services performed by a person or company who IS NOT the payor’s employee. (Link to instructions to Form 1099-NEC)
- 1099-MISC. Other payments over $600 that a payor makes for things such as rent, prizes, awards, or “other income payments” are reported on Form 1099-MISC.
One other wrinkle to this form question is related to credit card payments to a contractor/vendor. The IRS allows taxpayers to exclude from Form 1099-NEC any payments you made by credit card, debit card, gift card, or third-party payment networks such as PayPal or Venmo. These payments (over the $600 threshold) are being reported to the IRS by the card issuers and third-party payment networks on Form 1099-K.
How to File 1099-NEC Forms
You must file a copy of each 1099-NEC form with the IRS and get a copy to your contractors by January 31st. Currently, if you have less than 250 1099-NEC forms, you can choose to send paper copies. But if you have more than 250 1099-NEC forms, you must use the electronic filing system.
If your company has never filed 1099s or never filed electronically before, in order to do so on your own you will need to obtain an IRS E-Services account and then a Transmitter Control Code (TCC) for your organization. Applying for and maintaining an IRS E-Services account and TCC is an extra burden for many small business owners. As a result, for many small filers, it is more convenient to simply utilize a service like eFileMyForms to electronically file for you.
Taxpayers are required to print and mail out all Forms 1099-NEC and 1099-MISC forms by no later than January 31st. The deadline for the 1099-NEC to file with the IRS is also January 31st. The deadline for filing the 1099-MISC varies depending on the types of payments and falls on either February 28th or March 31st. The recipient and filing deadlines for the most common information reporting forms are included in the table below.
Diagram 1 – 2022 Deadlines for payments in 2021 requiring Form 1099s
Form 1099 Due Date to Deliver to Recipients Due Date to file Forms with the IRS by Mail Due Date to file Forms with the IRS via E-File 1099 NEC January 31, 2022 January 31, 2022 January 31, 2022 1099-MISC
(No Data in Boxes 8 or 10)
January 31, 2022 February 28, 2022 March 31, 2022 1099-MISC
(With Data in Boxes 8 or 10)
February 15, 2022 February 28, 2022 March 31, 2022 1099-B & 1099-S February 15, 2022 February 28, 2022 March 31, 2022 1099-ING, 1099 DIV, 1099-C, 1099-R, 1098, 1098-T January 31, 2022 February 28, 2022 March 31, 2022
*Always confirm any new updates at http://www.irs.gov before proceeding with tax filings.
Late/Incorrect Filing: Penalties for not filing a correct 1099 can add up quickly and vary from $50 to $110 per form, depending on how long past the deadline you file. In addition, if the IRS can prove that a business intentionally disregarded the requirement to provide a correct payee statement, they are subject to a minimum penalty of $550 per statement, with no maximum, and the IRS will typically charge interest on top of the penalties!
Diagram 2 – Penalty Table for 1099 Filings in 2022
Penalty per Form 1099-NEC, 1099-MISC, 1099-DIV, 1099-INT and 1099-R Length of Delay $50 Not more than 30 days late $110 More than 30 days late, but before August 2nd, 2022 $270 On or after August 2nd, 2022 $550 Intentional neglect to file
*Always confirm any new updates at http://www.irs.gov before proceeding with tax filings.
Name/TIN Mismatch: in addition to late filing fees, you could also receive potential penalties for any name/TIN mismatches, as we mentioned earlier. If you file several hundred forms, the risk of name and TIN mismatches becomes more likely.
With technology today, it is very easy for many small businesses to work with people all over the United States and the World. If you work with contractors or vendors in multiple states, you must also pay attention to various state 1099 reporting obligations. Many 1099 forms have specific state filing obligations. This adds exponential complexity to the process because instead of dealing with just one set of rules (the IRS), you may find yourself dealing with 5, 10, or more.
Some states require filing at different thresholds, some have different filing deadlines, and they each have unique filing methods. In many instances, state reporting can be satisfied through the IRS Combined Federal State Filing Program (CF/SF) where the IRS will electronically file original and corrected information returns to participating states for approved filers. The challenge is some states do not participate in the CF/SF and some that do still require your organization to directly file certain 1099 returns directly. The 1099-NEC is a good example where 26 states and the District of Columbia currently require the information to be filed directly with the state department of revenue.
To learn more about specific state reporting requirements, visit our 1099-NEC Direct State Reporting Service page.
Tax compliance can be a burden and every business owner hates the idea of wasting hard-earned dollars on activities that are not growing the business. But with a bit of process, a bit of planning, and the right tools, you can simplify the complexity of 1099 reporting and ensure compliance while spending as little time and resources as possible in the effort.1099 Basics for Small Business Owners – eFileMyForms