Q: What is IRS Form 1099?
Learn when 1099 Forms are required when working with freelancers.
The 1099 form is a type of form the Internal Revenue Service (IRS) refers to as “information returns.” Information returns are mandatory forms for notifying the IRS and taxpayers about taxable payments. There are many different 1099 forms that report the various types of income individuals and vendors receive throughout the year. A few examples are 1099-INT, 1099-DIV, 1099-A, 1099-CAP, 1099-G, 1099-C, and 1099-MISC. Starting with the 2020 tax year, the IRS has reintroduced 1099-NEC.
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Which IRS Form 1099 do I send to freelancers?
If you are a business that hires freelancers or vendors, you send Form 1099-MISC to each individual or entity that you have paid $600 or more during the tax year.
When do I need to file Form 1099?
Did you hire a freelancer or independent contractor to do some work for your business? If so, you’ll probably have to file Form 1099-NEC (prior to the 2020 tax year, you would file a Form 1099-MISC).
Depending on your business, you might have to file 1099-MISC forms for other vendors, too. For example, if your company pays $600 or more in rents (such as rent paid for your office space), medical and health care costs to healthcare providers, or vendors for prizes and awards, you’ll also likely need to file the form.
But the general rule of thumb is that you must file a 1099-NEC or 1099-MISC if the amount your business pays to any specific individual or entity during the tax year was at least $600.
However, you don’t need to file the form if you’ve made eligible payments to a tax-exempt organization or a government agency. In addition, if your payment is to a corporation, you generally can forego the 1099-MISC or 1099-NEC. This includes limited liability companies (LLCs) that are treated as a C or S corporation. Check the company’s W-9 for this information. There are also other circumstances in which a 1099-MISC is not required. For example, you’ll need a 1099-MISC if you pay rent to a landlord, but not if you paid it to a real estate agent or property manager.
Check out the IRS website to see a full list of payments that require a Form 1099-MISC.
How are W-2 Forms different than 1099 Forms?
While 1099 Forms report income received as an independent contractor or for other sources of income, W-2 Forms are provided by employers to employees. The IRS requires employers to record each employee’s salary and tax information and report it on W-2 Forms for every employee. Additionally, W-2 Forms require a social security number (SSN), but 1099 Forms can use either an SSN or an EIN (Employer Identification Number).
But the main difference between 1099 forms and W-2 forms is the treatment of tax withholdings. For 1099 Forms:
- Taxes are usually not withheld by the payer.
- Freelancers are responsible for estimating their taxes and paying the self-employment tax.
- Instead of the company withholding taxes with each payment, the freelancers must make tax payments quarterly based on estimated annual tax liability.
- Consequently, 1099 Forms don’t show taxes already paid to the government—just income from each client.
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Category: Compliance Ask Liquid Finance and Accounting
Updated: November 6, 2020
Quick note: This is not to be taken as tax advice or legal advice or payroll advice. Since tax rules and laws change over time and can vary by location and industry, consult a CPA / tax advisor and/or attorney for specific guidance.