Most independent contractors and businesses who have grown accustomed to reporting payments using a Form 1099-MISC. Well, 1099 taxes for independent contractors have gotten a bit more complicated in 2020. That’s because the IRS has implemented a new Form 1099-NEC for businesses to report their 2020 nonemployee compensation (NEC) payments to service providers, but the IRS continues to use a revised Form 1099-MISC for most other payments.
In the sections that follow, we will lay out the situations where businesses must issue either the new Form 1099-NEC or Form 1099-MISC and what information needs to be reported on the forms. We will then look at what freelancers and self-employed individuals working as independent contractors need to do when they receive a Form 1099-NEC, Form 1099-MISC, or both forms from a client.
How does a client get your information for your 1099?
If you are independent contractor and being paid to do work for a trade or business, most clients will ask you to fill out an IRS Form W-9. This allows them to accurately prepare your Forms 1099 and report payments made over the course of the year. This is a different form than the Form W-4 most employees must fill out when they start working for a company.
You’ll need to file a Form W-2 to report wages, tips, and other compensation you paid to an employee during the tax year.
The Form W-9 asks for the independent contractor’s name and, if it is a business entity, whether it is operating as a sole proprietorship, partnership, corporation, or limited liability company (LLC). The W-9 will also ask for the name of the business or disregarded entity if it is different than that of the independent contractor. A disregarded business entity is not recognized as being separate from its owner for tax purposes and do not file tax returns that are separate from those filed by their owner.
Additionally, the Form W-9 will ask for the independent contractor’s address and tax identification number (TIN), which is simply the owner’s Social Security number for sole proprietors without a business TIN. Finally, the independent contractor must sign the form to certify that all of the information it contains is correct.
Who gets a Form 1099-NEC?
When it created the Form 1099-NEC, the IRS sought to separate the payments businesses made to nonemployees for services from the other types of payments to nonemployees that are still reported on the Form 1099-MISC. Businesses are usually required to file the form whenever they pay at least $600 in a year to a nonemployee for business services, including legal services. There are several other situations where the Form 1099-NEC is used, such as when taxable fringe benefits are provided to nonemployees.
The IRS does have some exceptions to the Form 1099-NEC filing requirements that apply in certain situations. Those include instances where the business has made payments to a nonemployee who is operating as a corporation or an LLC; business travel allowances; and payments for merchandise, storage, freight, or telecommunications. However, businesses must report payments made to a corporation or an LLC that provided it with legal services.
Filing instructions for Form 1099-NEC
For the IRS’s purposes, the most important information reported on a Form 1099-NEC is contained in Box 1, which is where the business lists the nonemployee compensation paid. This is because the amount reported in that box is usually subject to the 15.3% federal self-employment tax to help fund Social Security and Medicare. Other information that a trade or business must supply to report payments on the Form 1099-NEC includes:
- The name and address of the trade or business that made the payment;
- The name and address of the payment recipient;
- The taxpayer identification numbers (TINs) of the payor and the recipient;
- Any federal income tax withheld (this is uncommon)
- State tax information.
Any businesses that have made nonemployee compensation payments that must be reported need to file the Form 1099-NEC with the IRS by February 28 of each year. A copy of the completed Form 1099-NEC must also be sent to the independent contractor.
Instructions for the revised form 1099-MISC
Before 2020 the IRS had required most payments businesses made to nonemployees during a calendar year, including service providers, to be reported on the tax Form 1099-MISC. While the IRS has moved reporting of payments for nonemployee services to the Form 1099-NEC, most other types of payment to nonemployees are still reported on the Form 1099-MISC, which remains the IRS’s general-purpose form for reporting payments to nonemployees.
The Form 1099-MISC is used by a trade or business to report payments of $600 or more during a tax year to nonemployees for the following miscellaneous income or taxable income:
- 1099 for rent paid to a building or property owner;
- machine rentals;
- Medical and health care, including payments to health care insurers;
- Gross proceeds paid to an attorney;
- Prizes and awards;
- Substitute payments that were made in lieu of interest or dividends and
Other income that is not reported elsewhere on the form.
Gross proceeds payments to an attorney are those made for reasons other than supplying legal services, such as a payment to settle a lawsuit. Payments for the services of an attorney must be reported on the Form 1099-NEC.
In some special situations, payments must be reported on the Form 1099-MISC that are smaller than $600 and others must be reported when direct sales payment exceeds $5,000. These special situations include the following:
- Royalty payments of at least $10 from intangible property, such as patents and copyrights.
- Sales of at least $5,000 of consumer products to a buyer who intends to sell them somewhere other than a permanent retail establishment; and
- Any backup withholding that is required by the IRS.
Backup withholding applies when a payer is required to withhold tax from payments that are not usually subject to withholding. An independent contractor may be subject to backup withholding at a 24% rate if it fails to provide the correct TIN or underreported interest or dividends on an income tax return.
While businesses had been required to file Form 1099-MISC by February 28, for 2020 the IRS changed the due date to January 31 so that it is due on the same date as the Forms 1099-NEC. The business must also send a copy of the Form 1099-MISC to the independent contractor who received the reported payments. You are not able to download and submit a printed version of Copy A from the IRS website.
You must receive a physical Form 1099-MISC, fill out Copy A, and mail it out to the IRS. Here's what to do if you do not receive a 1099 form.
Reporting form 1099 income on your income tax return
Under the new rules, a single independent contractor may receive both a Form 1099-NEC and a Form 1099-MISC from the same client when in the past they would have received a single Form 1099-MISC. This means that the independent contractors need to be on the lookout for two 1099 forms and must be sure to report both payments on their income tax return.
Independent contractors must report their Form 1099 income on Schedule C (Form 1040 or 1040-SR), Profit or Loss from Business (Sole Proprietorship). Additionally, if their business income or net earnings from self-employment total $400 or more during the tax year, he or she must also file a Schedule SE (Form 1040 or 1040-SR), Self-Employment Tax.
Unfortunately, the IRS has yet to finalize either the Schedule C or its Schedule SE for the 2020 tax year. However, a draft version of both forms is available and we used those draft forms as a reference for our discussions here.
Line 1 of the Schedule C is used to report your trade or business’s gross receipts and should include the amounts shown on any Forms 1099-MISC you have received. If the amount being reported on the schedule is less than that shown on the Forms 1099, you must attach a statement explaining the difference.
When filling out the Schedule C, you will be expected to supply an employer identification number (EIN) for the business that paid you. If you do not have the business’s EIN, leave that line blank.
The Schedule C will be used to calculate your net profit or loss for the tax year and, if that amount is greater than $400, it will be used on the Schedule SE to calculate the self-employment tax due for the year.
Remember to double-check your 1099
The first thing a taxpayer should do upon receiving a Form 1099-NEC or a Form 1099-MISC is to double-check the numbers against their own accounts to ensure they reflect the amounts you were actually paid. Since a copy of the form has also been filed with the IRS, a mistake in reporting could have significant tax implications. If there is a discrepancy between the amount reported and your records, you should contact the client that issued the form and ask that the error be corrected.
While most businesses that discover they have made an error will be willing to help you out and file a corrected Form 1099 with the IRS, there are times when the company will be unable or unwilling to correct the discrepancy. If you have good financial records that support your case, you can still file your income taxes using what you believe to be the correct payment amount and include a statement explaining the discrepancy and providing any documentation you may have. If you have any questions, check out the IRS.gov site for instructions for forms 1099.
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