What’s a 1099 Tax Form (and Why Might You Issue or Receive One?)
If you’re self-employed, you are required to pay income taxes like anyone else. However, because you don’t receive a W-2 from an employer, you are responsible for filing your own income tax returns.
For freelancers and independent contractors, filing your own taxes is made a little bit more complicated by the amount of legwork you have to do to understand your tax obligations.
This also rings true for business owners who pay non-employees for services rendered, because a 1099 form must be filed for each individual or business entity that receives non-employee compensation from you.
Read on to find out the process for 1099 tax forms, and what to do when you’re the one sending one, versus the one receiving one.
What is non-employee compensation?
Non-employee compensation is separate from employee wages, because company employees will receive a W-2 form from their employer that reflects their hourly wages. Freelancers, independent contractors, sole-proprietor LLCs do not receive a W-2 form from their clients.
Thus, nonemployee compensation is the term for payments made to independent contractors who are not technically employees of a company, but were paid for services provided – such as consultations, website design, freelance writing, etcetera.
While there are over two dozen types of individual 1099 forms, the one most commonly used in this scenario is the 1099-NEC.
Calculating your 1099 tax
Filing your taxes as a freelancer or independent contractor is a bit trickier than as a standard W-2 wage employee, because you must calculate how much you owe from all of your 1099-NEC forms.
A smart way to do this is to calculate how much money you should set aside from your gross income for paying your self-employment taxes – so ideally, you should use a self-employment tax calculator to help with meeting your tax obligations.
How do you receive a 1099-NEC form as an independent contractor?
Technically speaking, you should receive a 1099 form from any business client who pays you $600 or more per year. For freelancers and independent contractors, the exact form you should receive is the 1099-NEC.
This form replaced the non-employee compensation portion of the 1099-MISC, but it did not completely replace the 1099-MISC and some mistakenly believe. The 1099-MISC is still used for miscellaneous income, such as prize winnings, or commercial sale of fish.
As a freelancer or contractor, it is required that U.S. businesses send you a Copy B of the 1099-NEC by January 31. It is the responsibility of the business to file the 1099-NEC with the IRS, but the freelancer or independent contractor still needs a copy to report all income on a Schedule C form.
How do you issue a 1099-NEC form as a business owner?
For every independent contractor, freelancer, or other non-employee you pay $600 or more per year, you must file a 1099-NEC form with the IRS, and send a copy to the individual/business entity.
This includes vendors, sub-contractors, LLCs, and any other entities you pay for services rendered during the year.
However, you are allowed to exclude any payments you made to those mentioned entities if you made payment by credit card or debit card, or a payment platform such as PayPal. This is because those payments are already reported by the card issuers and payment networks on form 1099-K.
To start, you should request a form W-9 from the individual receiving pay, which will include their:
- Legal or business name
- Type of business entity (LLC, partnership, etc.)
- Current address
- Taxpayer identification number
If you’re paper filing, you also need Form 1096 as a cover sheet. However, you can file electronically on the IRS’s FIRE system (Filing Information Returns Electronically). That way you won’t need the Form 1096 cover sheet, but you must have a Transmitter Control Code (TCC), which is obtained by mailing or faxing a Form 4419 to the IRS. This allows you to create an account on the FIRE system.
If this all sounds a bit convoluted, and you can’t imagine why you need to file forms that allow you to file other forms, you can blame special interests groups and Congress for making things so complicated.
The IRS is swathed in bureaucratic tape because the tax system isn’t designed simply for government revenue, but for a huge range of target subsidies, different types of income, and a whole host of other tax breaks.