1099s – To Give or Not To Give?
As I’m pretty sure you know, it’s currently tax season – which also means it’s 1099 season.
But 1099s can seem pretty confusing. This post is here to help you understand what a 1099 is, who needs one and how to file them.
What is a 1099?
A 1099 is a form used to report to the IRS any payments you made to non-employees last year. Some of you have employees on payroll, so you don’t need to worry about a 1099 for them.
This is something that’s required by law to be filed for anyone you’ve hired as an independent contractor.
Your social media managers. Your VAs. Your bookkeepers.
I will go through the details of which contractors need a 1099, but essentially anyone who you hire on an ad-hoc basis – or who isn’t on your payroll.
1099s have been referred to as TattleTale forms, which I love. Their purpose is to make sure the IRS has a record of all the payments independent contractors have received.
Some people are shady about declaring their income to Uncle Sam. By filing a 1099 for the money you paid them, the IRS is getting a true record of all incomes paid.
How to prepare your 1099 form
Because you’re legally required to file 1099s, it’s important to know exactly what to do.
First off, you’ll need a W9 form from your contractor (you can google this if you’ve never heard of one). It gives you all the information you need to know about your contractor.
The information provided on the W9 will help you determine whether you actually do need to send a 1099, and will give you the details you need to fill it out.
Even though I’m referring to 1099s, I want you to know there’s actually two forms you need:
- The 1099 is the form you send to your contractor
- A 1096 is the version that you submit to the IRS.
You might also need to submit the 1096 to your state as well – check out my live training video on 1099s on YouTube to determine whether this applies to you.
So, who gets a 1099?
To decide whether you need to send your contractor a 1099, I’ve included a handy decision tree:
The two main requirements for sending a 1099 to your contractor are:
- Did you pay them more than $600?
- Are they registered as a sole proprietor or LLC? (You don’t need to send one if they’re registered as an S-corp or C-corp)
When you collect the W9 form from your contractor, this will state whether they’re an LLC, Sole Proprietor, or an S- or C-Corp.
1099s also only apply to people you’ve paid for a service. If you’ve bought a product – maybe something cute from Etsy – and you decided to tip the creator, you don’t need to worry about a 1099.
The American Rescue Plan
I want to include an aside about the American Rescue Plan: If you pay your contractors via credit card, Paypal business, or Venmo, then you don’t need to worry about a 1099; the third party merchant does that for you.
This only applies for 2022 onwards, however.
Paypal Business, Venmo, Credit Card companies, they only needed to declare to the IRS if a contractor was paid more than $20000. That’s a huge difference from the $600 you need to report if you pay directly.
Quite a few contractors were able to fly under the radar because of this, so if you’re submitting 1099s for 2021, I would still send them even if you used a third party merchant.
The American Rescue Plan hasn’t changed tax laws or the amount of tax you need to pay; they’ve just lowered the threshold for third party merchants to have to send 1099s.
If you’re a contractor reading this, and you’ve always been 100% honest with the IRS, then nothing’s changed for you!
Which Form to Send?
There are 2 types of 1099 form:
- 1099 Miscellaneous
- 1099 NEC (non-employee contribution)
The decision tree I included above will help you determine which form you need to send. The majority of contractors you hire will be to provide a service, so you’ll likely be sending 1099 NECs.
But if you’ve paid business rents, or you’ve hired a lawyer (who’s not an S-corp or C-corp), or if you paid royalties of more than $10, then you’ll need to send a 1099 Misc. form.
Unfortunately, you can’t just download a 1099 from the IRS website and submit it – you need to order one specifically to be submitted for your contractor. This is due to the way the forms are individually created, but you can order your 1099 online.
Some software can help you with filing your 1099s, but I highly recommend outsourcing this task. You can always shoot me an email, I am more than happy to help!
1099s – To Give or Not To Give???
That IS the question.
The decision tree below will take you through every step of determining whether you need to send your contractor a 1099.
In this case, a vendor is just another term for independent contractor. The questions you need to ask yourself are:
- Did you pay them for business rent, services or royalties?
- Did you pay them more than $600 (or $10 in the case of royalties)?
- Did you pay them directly with cash, cheque, ACH, or debit?
- Are they taxed as an S-corp or C-corp?
By following the steps in the decision tree, it’s simple to determine whether you need to send your contractor a 1099 or not – and a lot less overwhelming than you might have thought!
I know tax season can be a daunting time for a lot of small business owners, and I am always here to help you. My live training video on YouTube talks through all of the steps to sending and filing 1099s.
You can download my free Profit Plan tool, to help you track your business finances.
You can purchase my Know Your Numbers Now template for just $27 to do all the calculating for you.
You can hire my Virtual CFO services to take everything off your hands, if you want to!
Or you can simply just drop me a message. I’m always here to make managing your business finances as simple as possible!
Also, check out my website to learn more!