Imagine receiving a text that says, “Hey can you send me a 1099 showing the total amount that you paid me last year for the services I provided?” You may respond by saying, “Wait, what?! Is that something I’m supposed to do? Is that a tax form? How many people am I supposed to send that to? Am I late? Oh no, I think I’ve missed something!” Maybe you’ve seen this talked about on an Instagram post or a blog post, like this, about 1099’s for your contractors, and you immediately have a pit in your stomach because you know that you’re supposed to do something and you’ve heard about it before but the whole year has gone by and you haven’t done anything with it yet. That’s ok! Because I am here to talk to you today all about 1099s and I’m going to go over who needs a 1099, what types of business should be distributing 1099s, and then if you are a freelancer or contractor, I’m going to talk a little bit about what 1099s you should be receiving and who you should receive them from. So, hang in there, and we will get right to it!
First, I want to answer the question, what is a 1099 form? You know that it is a tax form, you know that it is somehow reporting wages, but you’re not sure exactly what it is. A 1099 form is used to report wages that were paid to a freelancer or a contractor. Now, this can be an individual or a business that is operating as a Sole Proprietor or an LLC. You can even report money that was paid to a landlord or an attorney. You can even report things like royalties that were paid to individuals or businesses. Based on wages that are not going to show up on a W2 form, which is your employee wages. So any wages or earnings that were paid or that you received, this is the form that they are going to show up on.
Now, prior to 2020, the most common 1099 form was the 1099 miscellaneous form. This form is what we would use to report those wages or those earnings that were paid and the most common box that we would use was box #7 which was non-employee compensation. So this is where you would put the funds that were paid, again, to an individual or a small business and this could be for things like maybe a marketing manager, social media manager, or a virtual assistant, the list could go on. Services that you are paying for where that individual is not an actual employee of your business but you did pay them wages for services rendered. That is what we would use that form for. Now, the 1099 miscellaneous form still exists today in 2020 but as of this year some changes have been made and box 7 is no longer used for non-employee compensation. Now, a 1099 miscellaneous form is most commonly going to be used for rents that were paid, or money that was paid to an attorney, or royalties, or things like that.
Now, a non-employee compensation wage would need to be reported on a 1099 NEC. And, if you guessed that NEC stands for non-employee compensation, then you’re right! You’re the winner! So now we use form 1099 NEC to report those wages that were paid or earned for non-employee compensation. Just think about services that were rendered for an individual or business that is not on your actual payroll.
Let’s talk about a couple of other things that are important and useful for you to know about 1099 forms. You do not need to distribute a 1099 to corporations. Anybody that gives you a W9 and lets you know that they are a type of corporation, whether a Scorp or a C Corp or anything like that, there are also some other times where you don’t need to distribute a 1099 form. It’s very common these days to pay your contractors with a credit card or a Paypal transfer, and in those cases where you are making payments with a third-party payment processor, you actually do not need to distribute a 1099 to that individual or that small business. And the reason for that is because the IRS says that if you are using a third-party payment processor, it actually becomes the responsibility of the third-party to distribute those 1099 forms. And at that point, the third-party payment processor actually distributes a form that’s called a 1099 K.
To hear a few common examples of some questions that may occur when it comes to using third-party payment processors and get some practicals tips, check out my YouTube video!
One way that we really like to keep track of the 1099 contractors being paid throughout the year is to use our accounting and bookkeeping software that we use all of the time and love, which is Quickbooks Online! In Quickbooks Online, every time you pay a contractor you can put that payment into Quickbooks and you can actually mark them as a 1099 contractor. When you do that it’s going to keep track of every payment you’ve paid them throughout the year. So go ahead and check out Quickbooks Online! It will not only help you with your 1099s but you can also do all of your bookkeeping in it and it’s super user-friendly.
What about if you are the contractor of the freelancer and you’re thinking, “Okay, when should I expect this?” Or, “What should I expect?” Basically, the answer to that is if you are an individual or you are a small business operating as a Sole Proprietor or an LLC, then you should be receiving 1099 forms from the businesses that you completed work for. So if they paid you with a bank transfer or a check, or something like that, then you would be receiving a 1099 form from them. It will probably be the 1099 NEC. So you would want to make sure that you receive that form from them. Now the best way to ensure that you are going to receive that form is to go ahead and provide them a W9 form. That’s going to have all of the information that they need.
Now, let’s talk about some due dates! And this will apply to everybody. For the 1099 forms, you need to distribute those by the end of January of any given year. So January 31st of any given year, those forms are due to the individual or the small businesses. If you are the business that is distributing them, you want to make sure you do that by January 31st. Or if you are the contractor or freelancer that is looking for them to be distributed to you, then you should be looking for those to arrive by January 31st. Then if you don’t e-file and you’re maybe using paper forms or something like that, you actually have until March 31st to submit those forms to the IRS. However, if you’re using a system like Quickbooks Online as I recommended, they’re going to e-file everything for you and it’s all just going to go at one time, which is really great. You don’t have to worry about it!
Alright, I hope that information was helpful and cleared some things up about 1099s for you. If you have any questions, please leave a comment below, we would love to answer your questions! Also, check out our services if 1099s is something that intimidates you or you just don’t even want to deal with it, check out our website and the services we offer at Steadfast Bookkeeping. Maybe our bookkeeping and tax services are something that will help you and we would love to help you with your 1099s as well.