Work with Independent Contractors? 7 Things You Need to Know About Form 1099-NEC
Navigating tax obligations can be overwhelming for small business owners. And if you work with self-employed pros like freelancers, subcontractors, or consultants regularly, it means even more paperwork! We’re referring to Form 1099-NEC, which ensures compliance and clarity in reporting payments made to independent contractors.
Below, we’re breaking down the essentials of Form 1099-NEC to explain its purpose, who needs it, and why accurate and timely filing is crucial. We’ll also outline the employer’s responsibilities for issuing this form and penalties for late filing.
What is Form 1099?
Form 1099 is the form you complete and issue to self-employed individuals you hire. It is an essential piece of independent contractor paperwork required for tax reporting that indicates how much you paid them. You’ll issue one copy to the IRS, send one to the contractor, and keep one for your records.
While there are 21 types of 1099 forms for specific types of income, for our purposes, we’ll focus on the 1099-NEC (Nonemployee Compensation). This is the version you’ll use to report payments to contractors for their services.
Who Should Receive a 1099?
You must issue a 1099-NEC to any independent contractors or businesses you paid over $600 during the tax year for services performed. This applies to LLCs, sole proprietors, and partnerships. You should have received a Form W-9 when you first hired each vendor, which should indicate their business entity.
You do not have to issue 1099s to:
Businesses or individuals from whom you purchased physical products—1099s only apply to services.
C corporations or S Corporations, unless you received medical or health care or legal services. The IRS has specified additional guidance for when a 1099-NEC should or should not be sent to a corporation.
Am I Responsible for a Subcontractor’s Payroll Taxes?
Nope! In most cases, independent contractors must pay their own federal payroll taxes, which are also known as self-employment taxes. These consist of 12.4% for Social Security and 2.9% for Medicare, totaling 15.3%. Self-employed professionals file these quarterly via Form 1040-ES, Estimated Tax for Individuals. They are also responsible for any state and local taxes, if applicable.
Occasionally, the employer may have to make a backup withholding from an independent contractor’s pay. This usually only happens when the contractor provides the wrong tax identification number (TIN) or has an income reporting error on their tax return.
When Do I Need to Issue 1099s?
The 1099-NEC filing deadline is January 31 of the following year. If this day falls on a weekend or holiday, you must issue 1099s on the next business day. You must send all copies—for the IRS and the independent contractor—by this date.
Note that the IRS does not automatically share the 1099s you file with states, so you’ll need to send Copy 1 to your relevant state tax department.
Why is Accurate & Timely Filing Essential?
Sending your 1099s on time for all applicable subcontractors is vital to avoiding penalties and mitigating additional liability with the IRS and your insurance company.
IRS Compliance
If you are ever subject to an IRS audit, the agency would want to ensure you are properly classifying employees vs. independent contractors by reviewing the type of people you hired and for what type of work. If you misclassify an independent contractor or don’t file their 1099, you could be responsible for paying a percentage of their taxes and a significant fine.
Insurance Coverage
Proper payment and documentation of your 1099 contractors are also critical for insurance purposes. If you currently have employees, you already have general liability and worker’s compensation policies. Your provider estimates your rates and coverage based on the number of W-2 workers and subcontractors you have.
When your insurance company audits your policies each year, they’ll ask for your subcontractor list through your policy effective date. This is why obtaining a certificate of insurance (COI) from each subcontractor is crucial to demonstrate that they are covered by their own insurance! That way, if they are injured on a job for you or a problem related to their work occurs, it won’t go against your insurance. The subcontractor’s coverage must be valid for the dates of the work they did for you.
On the other hand, if:
A claim occurs with one of your subcontractors, and they don’t have the proper insurance, it will hit your policy.
Your insurance company discovers one of your subcontractors doesn’t have the proper coverage—even if no claims occur—they could increase your rates.
Even worse, your provider could decide to terminate your coverage for noncompliance.
Bottom line: Ensure every freelancer and contractor you hire has the right coverage and collect that COI!
What are the Penalties for Late Filing?
Penalties for failing to file your 1099s on time vary depending on how far past the deadline you issue, including:
$60 per form for filing up to 30 days past due
$120 per form for filing 31 days late through August 1
$320 per form for filing after August 1 or not at all
$630 per form for intentional disregard
And if you’re a small business owner who works with multiple independent contractors per year, these fines could add up quickly! Spending the time and energy to ensure you issue 1099s properly is more than worth it.
How Do I Complete Form 1099-NEC?
Filling out and issuing Form 1099-NEC is fairly simple. Here’s a checklist to ensure you complete it correctly as you prepare your small business taxes:
Gather information: Collect the necessary information from the independent contractor, including their name, address, TIN or Social Security number (SSN), and the total amount you paid them during the year. Ensure this information is accurate and up-to-date. Remember, everything except the amount paid should be on their W-9 you collected!
Obtain form 1099-NEC: Obtain the official Form 1099-NEC from the IRS or an authorized stationery supplier, like Staples. Note that if you have 10 or more information returns (i.e., records other than tax returns), you must now file electronically.
Fill in payer and recipient information: Enter your business’s name, address, and TIN in the appropriate boxes on the form. Then do the same for the recipient.
Report payment details: Enter the total amount you paid to the contractor throughout the year in Box 1 (“Nonemployee Compensation”).
Check for additional reporting requirements: Find out if your state has specific forms or requires additional information for reporting.
File Copy A with the IRS: Mail or electronically file Copy A of Form 1099-NEC with the IRS by January 31. If applicable, send Copy 1 to your state’s Department of Revenue.
Send Copy B to the recipient: Issue Copy B to the independent contractor by January 31 of the following year for their records.
Keep Copy C for your records: Hold onto Copy C of all 1099s for your business records, which you might need for future tax purposes and potential audits.
Although this is a pretty easy process, it can become time-consuming when your contractor list grows. So to maintain compliance and save yourself and your internal team time, consider outsourcing this important task to an accounting and tax partner you can trust.
If you’re ready to take 1099 management off your plate and enjoy peace of mind knowing it’s done right without you having to lift a finger, let’s chat! Book an intro call with JLS Accounting today to learn how we can help.