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When the calendar year draws to a close, many business owners begin to review responsibilities for reporting taxes. One form small business owners frequently use is the 1099. There are over twenty types of 1099 forms, but the one most commonly used is the 1099 MISC.
Independent contractors, or freelancers, must use this to report income. With a changing economy, more employers have been turning to independent contractors rather than hiring full-time employees, and these businesses must report any services purchased in excess of $600. A business that employs an independent contractor must supply that contractor with a 1099 form at the end of the fiscal year, and the freelancer is required to use the 1099 form to report income and calculate any taxes due.
While regular employee wages are reported on W-2’s, only non-employee compensation is reported on the 1099-MISC. Misclassifying a worker as an independent contractor instead of a regular employee can cause costly problems with the IRS, so be careful to get the classification correct. The following are points to consider when determining whether a worker is an employee or independent contractor.
The 1099 must be sent to the independent contractor no later than January 31 of the year after the service was rendered, and there are financial penalties for sending it late or failing to send. The IRS is able to track financial transactions and cross-reference the amount recorded. It is easy to blur the line between an employee and an independent contractor, and the IRS is cracking down, so it’s important to get it right!
*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.
There is 1 comment left for Reporting Independent Contractor CompensationRandall Koch said: Wednesday, February 5, 2020
Greetings Brett & Company! Recently working through 1099s and looking for advice on your website just thinking that with the introduction of the 1099-NEC and the subsequent redesign of the 1099-MISC, perhaps your HBS community would benefit from an update. https://www.irs.gov/pub/irs-pdf/i1099msc.pdf https://www.delawareinc.com/blog/1099-form-when-and-why-to-use-it/ Thanks for all you do! Randall KochHBS Staff replied: Thursday, February 6, 2020
Thanks for the suggestion, Randall!