A 1099 form is an essential tax record that reports a taxpayer’s non-employment income. See how the 1099 works and why you need to know about it.
Form 1099 is an information return that reports a taxpayer’s non-employment income earned throughout the year. Who’s responsible for filing it? And how? Here’s everything you need to know about the 1099 Form.
Form 1099 is a tax document used to report certain types of income - this could include money from tax dividends, IRA distributions, state tax refunds, interest income, prize money, the sale of personal property, or credit card debt forgiveness. Each type of income is reported on a variation of Form 1099.
Businesses are most likely familiar with the 1099s that are issued to independent contractors - Form 1099-NEC. 1099-NEC states the amount of non-employee compensation a taxpayer has earned throughout the year.
Important Note: In 2020, the IRS rolled out the 1099-NEC to report money paid to people who provided a service but were not employees. The 1099-NEC replaced Form 1099-Misc for self-employed individuals.
Employers and financial institutions are typically responsible for completing 1099 forms. Any company that hires a contractor, freelancer, consultant, or other self-employed person and pays them $600 or more is required to fill out a 1099-NEC.
Since a 1099 is a record of non-employee compensation, anyone who has made money through a side hustle, small business, or as a freelancer receives a copy of this form from the paying client.
Usually, if a company paid a self-employed person $600 or more in non-employment income, they would file and send a 1099. However, there are instances where the employer does not need to send a 1099.
Most independent contractors that you come across will be registered as a sole proprietor or limited liability company (LLC). However, in the rare case that the contractor is registered as a C corporation or S corporation, they do not need Form 1099.
To find out if a contractor is incorporated as a C corp or S corp, you can check their Form W-9. Companies should request a W-9 as soon as they hire a new contractor.
If your business uses marketplaces like Fiverr, Upwork, or Outsourcely, you don’t have to worry about providing1099-NEC forms to the freelancers hired through these platforms. These platforms are considered payment settlement entities, which means they’ll take responsibility for filing Form 1099-K to freelancers that earn over $20,000 and have over 200 transactions.
As an employer, you should have a clear understanding of who’s an employee and who’s a contractor. This isn’t just for the ease of filing forms; the IRS has strict rules that define an employee versus a non-employee. Business owners sometimes try to misclassify workers as independent contractors to avoid paying medicare and social security taxes. However, the IRS imposes harsh penalties for businesses that do this.
Make sure to file Form W-2 to report wages, tips, and other compensation paid to employees throughout the tax year.
The main difference between a 1099 and a W-2 is that a 1099 is issued to contractors who then report their income to the IRS and pay their own taxes; a W-2 is sent to an employee to report their income and the withheld payroll taxes.
Employers must file W-2 forms, also known as Wage and Tax Statements, for each employee that had income, Social Security, or Medicare taxes withheld from their wages. Keep in mind that W-2s are separate from W-4s, which are used to indicate to employers how much tax to withhold from an employee’s paycheck each pay period.
W-2s are essential for determining whether a taxpayer will get a refund or need to pay taxes when they file their taxes.
There are several types of 1099 forms to account for the various types of non-employment income. Here are a few of the more common types of 1099s that you may run across.
The IRS released the 1099-NEC in 2020 as a way for employers to report income paid to non-employees. Prior to the 1099-NEC,employers used Form 1099-MISC.
Form 1099-MISC is the catch-all form for income types that don’t fit into other 1099 categories. The most common type of income that you might use this form are prizes and awards.
If a customer earns more than $10 in interest from a bank, credit union, or another financial institution, they’ll receive Form 1099-INT.
Form 1099-DIV reports dividends received. However, this doesn’t include dividends on share accounts at the credit union. Those would appear on 1099-INT.
What you just read above applies to hiring contractors and freelancers in the United States. But if you want to hire globally - and open up your talent pool - there are different rules to follow.
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