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 a bit different from the usual filing method of standard workers. Employees are familiar with the W-2 earnings form that indicates both gross and net income including all deductions from payroll, butfor 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 be from the bank informing you about your savings interest, a state tax due to refund, 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 money you received from the state or government, 1099-R for pensions and retirement plans, and 1099-S for closing a sale. Then there’s the 1099-CAP for corporate shareholders, 1099-DIV for dividends, 1099-INT if you earn more than $10 bank interest, and many more.
- Receiving a 1099 form doesn’t necessarily mean you owe income tax for that money.
- Your social security or taxpayer identification number should be reflected on the 1099 form.
- Deductible or not, it is better to report your income so that the IRS knows about it.
Hired 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.
Independent contractors are also referred to as “freelancers,” and they are the people you hire to provide a particular service or do a certain job. They can be graphic designers, content writers, photographers, web programmers, and event planners, among other types. Keep in mind that independent contractors are not employees, and they do not receive a monthly salary or enjoy employee benefits like standard workers.
- 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.
- The 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 these jobs for you. But if your budget is tight and you prefer to do these things to save some costs, filing a 1099 form shouldn’t be complicated.
The first thing you need to accomplish is to gather all the necessary data needed for the 1099 form. An easy way to complete this is by collecting a W-9 form for contracts because it contains all the relevant information you’ll need such as social security and tax identification numbers. Submit copies to the contractor no later than January 31 and provide another copy for the Internal Revenue Service. You need to submit these forms to the IRS before February 28 if filing by mail and no later than March 31 for those who file electronically.
- The date of work completion isn’t relevant, but the date and amount paid to the contractor matter.
- 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 transaction receipts and deduct 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 as deductible.
- A portion of rent and electricity is considered deductible if you work from home.
- Don’t forget to include your social security and Medicare contributions.
- The goal here is to report all taxable income to the IRS once, but not twice.
The 1099 and self-employment taxes
Be sure to note that 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.
The IRS is strict when it comes to reporting of payments. If, for example, you file a reports income of $30,000 and you don’t declare profits made on your tax return since they’re less than $400, expect the IRS to contact you for further clarification. It is important to keep all your 1099 forms in a safe and secure place to avoid penalties as well as incurring interest rates.
- 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.