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If you are a US business and you make payments to contractors or freelancers, you need to understand 1099 forms — specifically, Form 1099-NEC and 1090-MISC.
Even if you’re used to using 1099s, you may have missed some of the recent changes in tax law. Because failure to use 1099s correctly can result in compliance issues, fines, and penalties, every business needs to understand how they work.
In this article, we’ll cover all you need to know about 1099 forms to report expenses and stay in compliance.
A 1099 form is an information return form used by US payers to report business payments made to taxpayers of over $600 to the Internal Revenue Service (IRS). Put more simply, if your business pays someone more than $600 within a calendar year, you probably need to file a 1099 form to report that expense.
There are multiple types of 1099 forms, including 1099-NEC, 1099-MISC, 1099-DIV, 1099-INT, and 1099-R. However, this article focuses on 1099-NEC and 1099-DIV, which are the forms related to present and past contractor payments in the United States, respectively.
1099 forms are used to report a wide variety of business payments. There are many types of 1099 forms, but the forms most commonly used by HR managers are the 1099-MISC and the 1099-NEC.
Until 2020, Form 1099-MISC was used to report payments including those paid to contractors, freelancers, and individuals for services rendered. However, differing due dates created loopholes for bad actors to abuse the system.
As of 2021, the IRS re-instated the use of Form 1099-NEC to report all payments made to non-employee individuals for services rendered.
Businesses, individuals, and payroll departments should use Form 1099-NEC to report non-employee compensation for services rendered. These non-employees could include contractors, freelancers, and other taxpayers.
If payments meet the following conditions, they count as non-employee compensation:
You made the payment to someone who is not your employee.
You made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations).
You made the payment to an individual, partnership, estate, or, in certain cases, a corporation.
You made payments to the payee of at least $600 during the year.
For example, say your company needs to create a promotional video but doesn’t have a videographer in house. You find a freelancer to complete the project and pay them $4000 for the service. When filing your taxes, you would be required to file a 1099-NEC with BOTH the IRS and the freelancer.
The 1099-MISC is no longer used to report payments to contractors. Instead, it is used to report other types of business payments, including the following:
Prizes and awards
Other income payments
Medical and health care payments
Crop insurance proceeds
Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish
Generally, the cash paid from a notional principal contract to an individual, partnership, or estate
Payments to an attorney
Any fishing boat proceeds
You can download 1099 forms from the IRS website. Alternatively, you can order physical copies of forms from the IRS by clicking here.
If you are the payee, you will receive completed 1099 forms from your payers.
To fill out a 1099 form, enter the following information:
Payer’s name and address
Payer’s Tax Identification Number (TIN)
Amount of nonemployee compensation
Amount of federal tax Income withheld, if any
Amount of state tax withheld, if any
State or payer’s state number
Amount of state income
Check Box 2 if you made direct sales totaling $5000 or more of consumer products to the recipient for resale.
Payees do not need to fill out the 1099 form. However, they do need to report the income
The payer is responsible for submitting the 1099 form to the payee and to the IRS. Payees do not need to submit Form 1099s they receive. However, they should include the income described on the 1099 form when filing their tax returns.
Although the 1099 and the 1096 can be used together, they are not the same. Form 1096 is a separate information return form. It is used as a cover when returning various forms to the IRS on paper via mail. The 1096 covers forms sent to nonresident aliens, including 1099 forms.
Form 1099-MISC must be sent to recipients by February 1 and filed with the IRS by March 1 if filing on paper by mail or March 31 if filing electronically.
Form 1099-NEC must be sent to the payee and the IRS by February 1.
Businesses that fail to send 1099s to their payees or the IRS face the following fines and penalties:
Within 30 days of the deadline: $50 per form
After 30 days but before August 1: $110 per form
After August 1: $270 per form
If the IRS deems that you intentionally failed to file: $550 per form
Payees and workers are not required to submit a 1099. However, failure to report income can result in fines and penalties.
Managing contractors is different from managing employees. When managing employees, you must abide by specific laws and statutes governing employees, which include withholding income tax and paying payroll taxes. However, you do not have the same responsibilities for non-employees.
Failure to properly categorize a worker can result in serious consequences, including various fines and penalties. For example, if you classify an employee as a contractor, you will be required to pay back taxes, Social Security, Medicare, and unemployment. There will also be penalties for paying these taxes late. In addition, you may need to compensate the employee for benefits.
Staying compliant while managing contractors is essential for every business. Remote can help you manage your global contractors.
Proper classification of international workers is essential for compliance. According to the IRS, “Anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.”
However, classification requirements differ from country to country. Since the consequences of misclassification can be severe, you may benefit from an HR partner such as an employer of record (EOR) to help manage international workers.
Paying remote workers can be complicated, especially if your global payroll includes workers from more than one country. Remote’s Guide to Managing Global Payroll can help.
Because compensation varies globally, it can also be difficult to determine what to pay global employees. Do you pay everyone the same amount by role or adjust for cost of living? There are a few different remote compensation strategies, each with drawbacks and merits.
More and more businesses are recognizing the value of hiring remote workers abroad. However, doing so can seem complicated at first. Unless you have a local legal entity, you can’t legally employ full-time workers in other countries without some help.
Establishing a local legal entity can be both expensive and time consuming. In addition, you may be subject to permanent establishment, a type of tax classification that could mean your business owes corporate taxes in another country. But that doesn’t mean you can’t leverage the global talent pool to help your company grow.
With an employer of record, you can hire employees in other countries legally. A robust EOR partner can provide you with:
Deep understanding of local laws and statutes
Knowledge of the local workforce to develop competitive compensation and benefits packages
Contractor onboarding and management
When expanding your team into new countries, working with an EOR helps you move more quickly and guarantee compliance.
Understanding 1099 forms is a small but essential step to manage your freelance workforce, but Remote can help you with more than just taxation and compliance. Our Contractor Management platform is set up to help you pay local and international contractors with ease.
You can accept invoices and pay contractors across the world. Remote lets you easily manage and approve one-off and recurring invoices and initiate one payment for all contractors in your local currency.
The more your company expands, the more you may need help from contractors in countries around the world. Sign up in minutes and start managing contractors with Remote today.
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