When it comes to filing taxes, there’s a big difference between being an employee, a business owner, and an independent contractor. As a small business owner, your tax situation is different from the usual filing method of standard employees.
Employees are familiar with the W-2 form that indicates both gross and net income including all deductions from payroll, but for freelancers, service providers, contractors, and business owners, 1099 forms are used to file taxes.
Unlike your employees, you don’t have someone to withhold your taxes and you need to do it yourself to avoid penalties as well as legal charges. The 1099 information form isn’t just for state and federal income taxes, you can also use it to file social security and Medicare contributions. Depending on the nature of your business, you might need to send a 1099 to contractors and file them with the Internal Revenue Service (IRS).
What is a 1099 form?
The 1099 form is a record that someone – another entity or person who is not your employer - sent or gave you money. There are different types and sources of the 1099 form.
It can come from the bank informing you about your savings interest or from your client reflecting the money they paid for your services.
Some of the most common forms of 1099 includes:
- 1099-A for mortgage activities
- 1099-B for the sale of securities
- 1099-C for debt settlement
- 1099-G for the money you received from the state or government
- 1099-R for pensions and retirement plans
- 1099-S for closing a sale.
In addition, there’s the 1099-CAP for corporate shareholders, 1099-DIV for dividends, 1099-INT if you earn more than $10 in bank interest, and many more.
Keep in mind, receiving a 1099 form doesn’t necessarily mean you owe income tax for that money. If you receive a 1099 your social security or taxpayer-identification number should be reflected on the form. If in doubt, it’s always better to report your income to the IRS, rather than face potential penalties.
Independent contractors and 1099s
Employees have their W-2 forms for tax purposes, and they are usually filed or processed by the company. But for small business owners or those who hire independent contractors, you’ll be using a 1099 form. It serves as a record for all payments made to freelancers and independent contractors.
Freelancers or independent contractors are anyone who does work for you but is not a full-time employee, such as graphic designers, content writers, photographers, web programmers, and event planners, just to name a few. In addition:
- The 1099 form should be filed by businesses that pay more than $600 for services rendered by non-employees.
- The 1099 information form is only required for individuals or unincorporated businesses like LLCs.
- Form 1099-Misc is the form that the IRS uses to track miscellaneous income reportable as earnings.
How to file a 1099 form for independent contractors
If you don’t want the hassle of completing tax forms and submitting reports, you can hire payroll services or accounting firms to do it for you. But if your budget is tight, you can file it on your own.
First things first gather all the necessary information needed for the 1099 form. An easy way to do this is by collecting a W-9 form for contracts as it contains all the relevant information you’ll need such as social security and tax identification numbers.
Next, submit copies to the contractor no later than January 31st and provide another copy to the Internal Revenue Service. You need to submit these forms to the IRS before February 28th if filing by mail and no later than March 31st for those who file electronically. Keep in mind:
- The date of work completion isn’t relevant, but the payment date and compensation amount is
- For the exact form reports submission deadline, visit the IRS website for more information
- State tax laws differ; you might need to file your state tax commission along with your 1099
1099 forms for small businesses
Small business owners can both receive and submit 1099 forms. If you’ve already generated the form by recording and reporting income in your accounting or point-of-sale software, no additional steps are required. Should you receive a form, the only thing you need to do is to double-check the declared totals for accuracy.
But if you haven’t declared amounts as income, it needs to be reflected on your information returns. You can collect all your business receipts and deduct the necessary expenses before calculating your tax.
As long as the expense is “ordinary and necessary,” or is essential for the operation of your business, it can be considered deductible. In addition:
- A portion of your rent and utility payments are considered deductible if you work from home
- Don’t forget to include your social security and Medicare contributions
- Don’t report the same deductions twice
The 1099 and self-employment taxes
The 1099 information form is just a record of payments made. Unlike paychecks issued by companies, no payroll taxes have been deducted. Additionally, small business owners and their independent contractors or freelancers don’t have the so-called employer/employee relationship, meaning you are responsible for your own Federal Insurance Contributions Act (FICA) tax.
It is important to keep all your 1099 forms in a safe and secure place to avoid penalties as well as incurring interest rates. In addition:
- As a self-employed person, you should pay half of the FICA tax which is approximately 15.3% of earnings
- You should also make an estimated tax payment for the entire year to cover tax liabilities
- Always report the correct amount of income and if in doubt contact the IRS
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