Independent Contractors and 1099s FAQs.
The Gig-worker community is on the rise. These gig workers are now working more as independent contractors (IC's) or what we call 1099's instead of as full- or part-time employees. The tax form 1099 is designated for independent contractors and is designed to document and track payments you make to ICs for services they provide to your company. The1099s also help ICs accurately report their income when they file their taxes, as well as provide a mechanism for the IRS to ensure ICs' income is properly reported.
Although the full spectrum of rules and procedures governing 1099s can change with time, the fundamentals have stayed fairly consistent, even in the wake of Trump’s tax overhaul. If you hire an IC to perform services for your business, you should be aware of these 1099 basic guidelines—and reach out to us and/or your CPA if you have more specific questions.
Who is required to file a 1099?
When you hire an IC to provide a service to your company, it's essential that you report the payment to the IRS on a 1099 form and also provide a copy of the report to the IC. Although there are various forms of the 1099, the most common is the 1099-MISC.
As a general rule, you must file a 1099-MISC for each individual or entity you pay for services provided to your company. Note that 1099s are only required when paying for services, not goods or equipment. If you paid your IC through PayPal, you do not need to file a 1099; PayPal handles that on their end. And if you paid your IC through their corporate business entity, you also do not need to issue a 1099. What qualifies as a service?
Services can range from legal fees, building the company website, creating company's branding, rent, royalties, and making broker payments.
Is there a minimum payment amount?
Like every tax threshold, for requirements to reporting payments made to an IC, most transactions only require at least $600 in a calendar year. However, you can still file a 1099 even if you don't meet the threshold.
What individuals and entities qualify?
In most cases, a 1099 is issued to everyone except corporations (S corps and C corps). Therefore, 1099's covers individuals, partnerships, and most business entities.
There are several special circumstances where payments to corporations are reportable, requiring a 1099 filing. These exceptions are listed in the Form 1099-MISC instructions, but consult with us or your CPA for more details.
What information do you need to include?
Prior to filing a 1099, you'll ask your IC to complete a W9. On that W9, it asks for pertinent information such as the IC's name or business nae, and their taxpayer ID and address. Therefore, always make sure you get the W9 prior to the end of your tax seasons so that all the information you need is available especially if you expect to pay at least $600 in a year before you pay them.
What are the deadlines for 1099s?
The IRS has set a deadline of January 31st to tender 1099 forms to ICs. IRS also requires that transmittal form 1096 be sent before February 28. Neglecting to file your 1099s, or filing late, can cause you fines that can range from $50 to $270 per form, with a max of $1.5 million for the years.
We can help While hiring ICs can provide your business with significant advantages, you need to pay close attention to the rules governing 1099s to avoid penalties and other complications. Indeed, there are several additional considerations regarding correctly classifying ICs and properly drafting IC agreements that are equally, if not more, critical. For trusted guidance on hiring, classifying, and paying ICs, consult with us as your Innovative Business Lawyer. We can help you maximize the benefits—and minimize the liabilities—that can come from employing ICs to help operate your business.
This article is a service of Sivonnia DeBarros, Innovative Business Lawyer. We offer a wide array of business legal services and can help you make the wisest business choices throughout life and in the event of your death. We also offer a Business Protection Start-Up Session or a Business Planning Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.