1099 rules for employers have changed more than once over the last few years.
The perception of moving goalposts is one of the reasons why businesses feel like working with freelancers is a lot of complexity and hard work.
However, when you look into the details, 1099 employees aren’t actually more complicated to work with, especially if you keep to a few main do’s and don’ts. This article will outline the main rules to consider, so that you can reap all the benefits of working with independent contractors.
This article is part of our guide on 1099 employees.
Do think about misclassification risks
One of the first 1099 rules for employers is to make sure that the workers in question really are 1099 employees! 1099 employees is a common term for independent contractors, and as a business you therefore won’t be subject to labor laws such as overtime, sick pay, PTO, and employee tax withholding. However, there are strict rules around who is classified as a 1099 employee, and who should really be an employee.
It usually comes down to the level of control the worker has. Do they set their own rates, choose their own working hours and location, and have the ability to say yes or no to projects on an ad-hoc basis? If so, they are probably a 1099 employee. On the other hand, if they are working only for your business and you retain control over what work they do and their income, you could be at risk of misclassification if you don’t treat them like any other employee.
Don’t forget your filing requirements
Now that you know how to classify your workers, what are your requirements for 1099 employees? The main requirement is filing form 1099-NEC. The threshold is simple – if you pay a freelancer more than $600 in any year, you’ll need to issue form 1099-NEC, giving one copy to the contractor and filing another copy with the IRS.
One interesting exception is for payments made via third-party services such as PayPal or credit card companies. In this case, the third-party takes on the filing responsibility, and will need to fill in a 1099-K form, and you can exclude these payments from your own filing.
The due date for filing was January 31st in 2022, and is likely to be the same for 2023, despite the previous deadline in past years being the end of February. Give yourself plenty of time, because you’ll need to order the forms, and pick them up from your local post office or another location such as an IRS service center, and you might need to file the forms with your state as well, depending on where you live.
Another consideration is whether or not you need to file electronically. For businesses who have more than 250 1099-NEC forms to send in, the answer is a big fat yes. You could even get a hefty fine of $2,500 or more if you fail to file electronically and you don’t have a good reason. If you have fewer than 250 forms, you can choose to file in whatever way you want, whether that’s electronically or old-fashioned paper filing, but electronically will probably make your life a lot easier.
Do implement a comprehensive onboarding process
The last thing you need is to be in the middle of filing season, and to be held back by not having the information that you need about your non-employees. This is usually information like the worker’s ID or Taxpayer Identification Number (TIN), the worker’s address or full name, and other details which you might not have on record or immediately to hand. That’s why a comprehensive onboarding process makes a big difference when working with freelancer.
One of the steps of a thorough onboarding is to ensure your US-based freelancers complete form W-9. Here you will ask them for their social security number or taxpayer identification number, setting you up with all the information you need for your 1099-NEC form, ahead of time. Remember that if your independent contractors are not US citizens, including non-resident aliens, they will need to fill out form W-8 instead.
Don’t ignore your 1099- MISC responsibilities
In most cases, your business will also need to file a second form, the 1099-MISC. While this used to be the only form businesses needed to consider for independent contractors, the NEC form was brought back in 2020. However, that doesn’t mean you can ignore 1099-MISC. As the name suggests, this form is for other types of income deemed to be miscellaneous. These include rents, prizes and awards such as:
– If you’re paying for office space, physical land, or machinery that costs your business more than $600
– If you have paid royalties that amount to greater than $10. This will be relevant if you work in areas such as media, copyright or trademarking.
– Monetary prizes and rewards given to individuals for participation in studies or research programs
– Any payments received in damages or settlements, including for sickness or non-physical injury.
Do treat freelancers like part of the family
When you’re considering 1099 rules for employers, here’s an unwritten one – don’t leave independent contractors on the outside looking in! Freelancers make up more than one third of the workforce, and that number is growing from year to year. The future will be a hybrid model where businesses regularly work with departments and teams made up of full-time employees and contractors side by side.
Those which thrive will be companies who can form a cohesive culture where independent contractors feel like part of the gang. This means considering elements of the relationship such as:
- Communication: Opening strong lines of communication so that freelancers understand you’re looking to build a long-term relationship.
- Transparency: Sharing relevant information about the growth and the direction your company is heading in, and not keeping them in the dark.
Rewards: Offering perks and opportunities that keep 1099 employees loyal to your brand, despite the inherent freedom of their business model.