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When Does a Business Owner Need to File a 1099-NEC Form?

When Does a Business Owner Need to File a 1099-NEC Form?

As a business owner, you must be careful to file all tax forms for W2 employees as well as for freelancers, gig workers, and independent contractors.  You may have many people performing services for your business. It’s important to know how to differentiate each type of worker. 

What is 1099 income?

A 1099 form is a record from any person or entity (other than your W2 employer), detailing the amount of money you have been paid throughout the year.  All 1099 income must be reported on your tax return; the IRS also receives a copy of each 1099 form that you receive.  Therefore, it is important that what you file for your tax return needs to match what the IRS has in their records.  You may be flagged for an IRS tax audit and/or get fined if you don’t report all 1099 income.   

There are several types of 1099 forms you may receive. They can cover income from rent payments, cancelled or forgiven debt, the sale of certain securities, dividends, unemployment compensation, tax refunds, financial institution interest, long-term care payouts, prizes, distributions from pension, retirement plan, profit-sharing program, IRA, annuity, health savings accounts, and more.  The 1099 form we are concerned with in this article is the 1099-NEC.  

What is the 1099-NEC? 

The 1099-NEC is the form businesses must use to report compensation of at least $600 paid to non-employees during the year.   

  • This does NOT include any payments to W2 employees, even if it’s for reimbursed travel expenses or PTO. 
  • This DOES include income to freelancers, gig workers, and independent contractors (who are not registered as a corporation).   
  • Freelancers and independent contractors have to pay self-employment taxes on income for the year that is greater than $400. However, they will not receive the 1099 unless the income is at least $600.   
  • This does not include personal payments; rather, it is for payments for services to the business. 
  • Eligible payments include commissions, fees, prizes, and awards for services rendered to the business.

  • This does not include payments to most corporations (except in the case of attorney’s fees and a few other rare instances).  The exemption also includes payments to LLCs and partnerships that choose to be treated as S or C corporations. 
  • It is important to note that payments for legal services, regardless of the business structure, must be reported on the 1099-NEC if they are $600 or more.   
  • This does not include payments to a tax-exempt organization.

If you receive independent contractor income, the IRS will classify you as a sole proprietor. This is the case even if you don’t have a formal business entity. You may owe self-employment taxes on the income. 

Employee vs. Independent Contractor?  

It can be tricky to differentiate between who should be considered an employee and who should be considered an independent contractor, but theIRS provides clear guidelineson how to determine the two worker types.  The distinction is important because there are penalties for misclassification.  In general, the person providing services should be an employee if the business owner: 

  • has control over WHAT work they do.
  • has control over HOW the worker does the work. 
  • provides equipment for doing the work. 
  • provides benefits such as retirement plans or health insurance to the worker. 
  • provides office essentials, such as a desk, a computer, etc.  

In contrast, workers who control how the work is done, use their own equipment, and work with many clients are independent contractors (AKA “1099’s”).   

When a business works with a freelancer or independent contractor, they must first request a W-9 form from the person who is to be paid.  This will include all the information (taxpayer ID number, mailing address, etc.) that will be needed later when issuing the 1099-NEC. The business must send the 1099-NEC by January 31 of the following year. The exception is if that falls on a Sunday. In that case you must send the forms by February 1.

Oftentimes, the business prefers to hire freelancers and independent contractors rather than employees. They don’t have to pay all the benefits, and it’s much easier to terminate a relationship with a contractor.  However, there are still many benefits to hiring W2 employees over contractors. You’re providing  job security and in return, earning the employee’s loyalty and increasing staff retention.   

No matter what you as a business owner decide, it’s important to know the distinction between employees and independent contractors, and what IRS forms you are required to file. 

Have more questions? Feel free to reach out, we’d love to help!

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Angie Noll
angien@reconciledsolutions.net