If you are a business owner reporting taxes can be confusing. As of 2020, there have been some changes to 1099 tax reports that you should keep in mind.
Whether you own a small business or have been participating in the new gig economy you’ll need to know about these changes. This article will explain what 1099 tax reports are and what you should do with them.
What Are 1099 Tax Reports
When a person other than your employer pays you money, you will receive a 1099 record of that payment. The person or business is legally required to send you and the IRS a copy of this 1099 form.
Look for these forms in February as you prepare for tax filing season. There are a few different types of 1099 forms you may receive. Each form serves a different purpose.
Freelancers and independent contractors use to receive a 1099-MISC form. In 2020 that form has been updated to the 1099-NEC form.
This form shows money paid to the freelancer that is over $600. This is not the same as a W-2 form that employees receive at the end of the year.
The IRS will know if you do not report income from your 1099 form because the company that paid you also reports the same information to them.
But keep in mind, just because you receive a 1099 form doesn’t mean you owe taxes on that amount. Usually, freelancers and contract workers have deductions that offset their income.
If you are new to freelancing or contract work hiring someone to help with tax prep can help you take advantage of these deductions.
How to Use a 1099 Form
So how do you how to report a 1099 form? You or your tax professional will use the 1099 form to figure out exactly how much money you paid to freelancers and contractors last year. The 1099 form will also tell what type of income was paid.
This income will be reported in different places on your tax form depending on how it was earned. From this document, you can figure out a sales tax report and a business tax report.
If you pay your freelancers or contractors via PayPal or a third-party you may need to file a 1099 K report. This PayPal tax reporting will show all the payments that were paid to contractors via third party services.
If your small business is a franchise you may need to do a franchise tax report. This is mainly for corporations and larger business entities, but sometimes small businesses will need this report too. Consult your tax professional for more details if you run a franchise.
The deadline for companies to file a 1099-NEC is January 31st. If that date falls on a weekend then the deadline is moved to the Monday following the weekend.
You can wait to receive these forms in the mail or sometimes you may be able to download them from the companies HR or payroll website.
How to File a 1099 Form
If your business hired contractors or freelancers you will need to send them a 1099 form as stated above. Here is how you go about that process.
Gather all the information you have on hand for each independent contractor or freelancer you hired. You will need to know the following:
- The amount they were paid
- Their legal name
- Their address
- Their Tax Identification number or Social Security number
You should have all of this information from the W-9 form they filled out when you hired them to work with you. Keep W-9 forms on all contracts and freelance employees in a safe place so that when it comes to tax time you can easily access this information.
Check your bookkeeping or payroll software for the amounts that you paid them during the year. Use this information to fill out the 1099-NEC.
Then submit a copy to the IRS by January 31st. You can do this electronically or through the mail. Download the form from the IRS website if you choose to send the form through the mail.
After that, you will need to mail a copy to the Independent contractor so they can use it on their taxes too.
What Happens if You Miss the Deadline?
Relax, missing deadlines happen to the best of us. It isn’t the end of the world. You will have to pay the IRS a late penalty for each 1099 form that missed the deadline.
Here are the penalties:
- $50 if you file the 1099 within 30 days
- $100 if it is more than 30 days late but before August 1
- $260 if you file after August 1
If the IRS feels like you intentionally missed the filing date they could charge you up to $530 per form. If you can’t file the form on time you can request an extension from the IRS. However, this extension is just for the IRS. It doesn’t include the form you are legally required to send to the freelancers and contractors you hired.
Submit a 1096 Form
After you file your physical copy of the 1099-NEC form you will need to complete a form 1096. The 1096 form is used by the IRS to track every physical 1099 form your business is filing for the year.
It helps them keep track of how many contractors or freelancers your company has hired. The deadline for the 1096 form is also January 31st. Check with your state to see if it is required for you to send them a copy of your 1099 form.
If you are not sure aways double-check with a tax professional to make sure your small business stays compliant.
Information for Contract or Freelance Employees
If you are a contract or freelance employee it is the client’s responsibility to send you the completed 1099 form. If for some reason you have not received a 1099 from a client by the deadline make sure you get a hold of them and request one to be sent to you.
This paperwork is an important part of how you will file your taxes in April. Freelancers and contract employees must report all of their income on their tax returns.
Tax Reports Can Be Confusing
The IRS’s tax reports system is not the easiest in the world. As a small business owner, it is important to stay organized and stay on top of deadlines to make sure you don’t get charged additional fines or run into legal trouble.
The 1099 form is going through some changes but use this guide to help you sail through tax season without any disturbances.
If you enjoyed this article be sure to check out our other business articles for small business owners.