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Want to understand the ins and outs of the 1099 form, so you can make your business more efficient and support your own independent contractors? Keep reading!
This article is part of our guide on independent contractor taxes.
What is a 1099 Form?
A 1099 form is a way of reporting that a non-employee has been paid for a job by someone who is not their employer. It is a piece of documentation that the IRS requires, and individuals will use it to declare income that is not from a traditional employer/employee relationship. For example, while employees use a W-2 form, independent contractors use form 1099-NEC.
There are a few different types of 1099 forms that you may hear about, including:
1099-NEC: This is the standard form that employers need to use to declare income given to non-employees. A business will use 1099-NEC to report any non-employee compensation that is above $600 in the tax year. It replaces the function that was held by box 7 of the 1099-MISC form.
1099-MISC: As MISC is short for miscellaneous, it’s no surprise that this form is used to report income that doesn’t fall into the usual categories of employee wages, or freelancer payments. Almost any payment that a business makes of more than $600 needs to be reported on this form, including medical and healthcare payments, renting of equipment of office space, awards and prizes, and cash payments or royalties of any kind.
1099-K: This form is related to income that you receive for goods and services that arrive via credit card, or any other third party payment system. This includes FinTech apps such as CashApp or Venmo. While previously, you would need to receive more than $20,000 across more than 200 transactions to file a 1099-K, for 2023, the IRS has reduced the reporting threshold to $600, no matter how many transactions are received.
Who Should Receive a 1099?
When tax filing season rolls around, there are many different kinds of people who will expect a 1099 form.
The most common is independent contractors. As they are not employees of your business, you need to report their earnings separately, if they amount to more than $600. Other examples will be those who you pay rent or royalties to, who will need a form 1099-MISC, and those who receive interest or dividends. Take brokerage firms or mutual funds. They will need to use form 1099 to report all interest that they have given to their investors during the previous tax year.
In most cases, it will be obvious which form 1099 you need to fill out and send. However, each has its own strict criteria, so make sure to research the various forms and make sure you’re choosing the right one. You can contact your local IRS office for help, and to ensure you avoid penalties.
What is the Process of Reporting 1099?
To help you with reporting 1099 forms, we’ve broken down the process into four easy steps.
Step one: gather the necessary information
You can’t fill out a 1099 form unless you have the right information to hand. Many businesses wait until filing season to ask freelancers and other beneficiaries for important data, but this can lead to bottlenecks and delays. The best way to make sure you have what you need is to not start work until you have all the right details, such as a freelancer’s taxpayer identification number, and their address.
Step two: complete the right form
Now think about what form you need to fill in. For independent contractors, it will usually be form 1099-NEC. However, ask your freelancers if they are self-employed, or if they have registered as a C corp or an S corp. If they have, you can simply confirm their filing structure on their W-9, and you don’t need to file a 1099 at all.
Step three: think about e-filing vs paper filing
Consider whether you want to use electronic filing or paper filing. Many people think paper filing is only for technophobes, but the truth is it can be the right option, especially if you have attachments to add to your submission, or you have a large amount of additional information to include. Paper filing can also feel more secure in industries where data privacy is a large concern. Remember though, that e-filing is much quicker, so if you’re planning on paper filing – start early!
Step four: make sure you don’t miss your deadline
No matter what, you don’t want to miss the filing deadline. Businesses need to complete form 1099-NEC by January 31st, and form 1099-MISC by March 1st on paper, and March 31st for e-submissions. The penalties for missing these deadlines begin at $50 per form, and can be as much as $290 per form, depending on how late the filing is completed. For intentionally ignoring the filing deadline, the minimum penalty is $580 per form, and can be as much as 10% of the income, without a maximum limit.
How Fiverr Enterprise Ensures Best Practices for Reporting 1099 Forms
Fiverr Enterprise improves and automates the process of reporting and filing 1099 forms through streamlined workflows. We verify all information while your freelancers are still potential candidates, making sure that you have all the necessary details and data on file to complete all documentation when filing season rolls around.
We help you to maintain thorough records by continuously checking for compliance and changes to freelancer status, so you’re never left stuck when it’s time to get those forms to the IRS and to your freelancers themselves.
No need to mark your calendars, as Fiverr Enterprise will stay up to date on deadlines, even if they move due to weekends or holidays, and ensure that all the right forms are submitted accurately and on time, so you have zero chance of penalties.
For the majority of businesses, e-filing will be the best practice, and Fiverr Enterprise can help you get set up so that reporting is a process that happens seamlessly and automatically in the background.
Let us take the administrative burden off your teams, and allow them to focus on adding strategic value elsewhere.