The 1099-MISC is used to report certain types of non-employee income. As of the 2020 tax year, the 1099-MISC is now only used to report the following types of income worth at least $600:
Additionally, use a a Form 1099-MISC for:
Compensation for freelancers and independent contractors are no longer reported using a 1099-MISC. Instead, they are reported using a 1099-NEC.
This document, technically known as the 1099-MISC Form, is a tax document that confuses. Who gets one? Who doesn't? Do I need to send them out? Many a bewildered business owner just decides not to bother with it because they just don't know what to do. Fortunately, this form is relatively simple to understand and easy to fill out once you grasp the basics of completing the form and who needs to receive one.
The IRS provides specific and clear instructions on when a 1099-MISC must be used. For example, if you received at least $600 in rental income, you would use a 1099-MISC. If you paid a lawyer at least $600 for legal services of some kind for your business, you can send them a 1099-MISC. If you received a prize or an award worth at least $600 or if you give out a prize worth at least $600, a 1099-MISC is required/ If you were paying an independent contractor or freelancer for at least $600 in services, you would use a 1099-NEC.
The individual or business receiving a 1099-MISC can use it in addition to or in place of the W-2 that they would win in a standard employment arrangement.
As previously mentioned, it is also used to report a prize or award from a business. It reminds the recipient that they must pay taxes on that item or income (if they haven't done so already). It provides documentation that tells them exactly how much they've received from your business.
Don't delay or skip sending out the document by the end of January for the previous tax year. Failing to send it out as required can be punishable by fines of $30.00 to $100.00 per form.
If the IRS proves that a business intentionally disregarded the law when they failed to send out the proper form, the penalty starts at $250.00 per missed statement and with no maximum.
There are quite a few exceptions for which you do not need to send out a 1099-MISC (although this does not mean that the income is not taxable for the recipient). You're not required to send one to real estate agents or sellers of merchandise, storage, freight, etc. However, you are required to send one to any lawyer that you paid more than $600 to in a calendar year, even if they work with a law firm.
Those who need to send out a 1099-MISC can acquire a free fillable form by navigating the website of the IRS, which is located at www.irs.gov.
Once you've received your copy of the form, you'll want to familiarize yourself with the various boxes that must be completed.
Under the checkboxes that say "VOID" and "CORRECTED" (which are only to be used in exceptional circumstances), you'll find in the upper left corner a relatively large field for the payer's name and necessary contact information.
Under that large box will be two smaller fields: one on the left for the payer's federal identification number (F-EIN) and one on the right for the recipient's identification number (that's a fancy way of referring to their social security number, their taxpayer identification number (TIN), their adoption taxpayer identification number (ATIN), or their F-EIN. One thing to keep in mind is that a Box number doesn't designate this information as you'll notice on the right side of the page and other tax return documents.
Interestingly, even though the contact information for the payer was just one large box, the fields for the recipient's name, street address, city, state, and zip code are separate. These separated fields are located under the boxes for the federal identification numbers of the payer and recipient of this IRS form.
Next, you'll see the account number field. It is located on the left side of the form, and it does not have its Box number. The account number is generally filled if the payer has multiple accounts for a recipient for whom they file more than one 1099-MISC Form.
You'll see a little checkbox for FATCA Filing Requirement. This refers to the Foreign Account Tax Compliance Act filing. You, as the payer, must be a U.S. citizen required to report specified foreign tax payments. This box has no identifying number. It is located directly to the right of the Account Number Box.
Next to the FATCA Filing Requirement checkbox, you'll see another checkbox for 2nd TIN No. Check this box if you, as the payer, were notified twice by the IRS that the recipient's TIN was incorrect. This notification takes place over three years.
Box 1 is located on the right side of the page. It is designated as Rents. You would report rents from real estate listed on Schedule E or Schedule C (depending on your circumstances). You can learn more about this box in the IRS instructions for the 1099-MISC Form.
Box 2 is designated as royalties for oil, gas, mineral properties, copyrights, and patents from Schedule E. You'd also use this box to report payments for working interest. If you receive royalties on timber, coal, or iron ore, you should consult IRS Pub. 527.
Box 3 is used to report other income from Form 1040. You'll also identify the type of payment. For example, if you won a prize worth $650, the amount would be reported in this box, and you'd designate that as a prize. If the money is trade or business income, it is published on Schedule C or F, but will still be listed here.
Box 4 records backup withholding or withholding on Indian gaming profits.
Box 5 records money received by fishing boat operators who are self-employed.
Box 6 is for medical and health care payments that are reported on Schedule C.
This box holds a checkbox that you will use if you made direct sales totaling $5,000 or more of consumer products to the recipient for resale. Remember that freelancers and independent contractors now have their payments reported via 1099-NEC.
This box records substitute payments instead of dividends or interest.
Box 9 records crop insurance proceeds.
Box 10 records the gross proceeds paid to an attorney.
Box 12 records Section 409A deferrals.
Box 13 is designated as Excess golden parachute payments. Excess golden parachute payments are reflected on Form 1040, and they are subject to a 20% excise tax.
Box 14 is designated for nonqualified deferred compensation.
Box 15 holds information for state tax withheld. There is space for two states. Box 16 records the state or payer’s state numbers. You will notice that there is enough room to list information for two states.
Box 17 is used to record state income. Like the two previous boxes, there is enough room to list income for two states.
Boxes 15 through 17 track state information, and they are only provided for the payer's convenience. They do not need to be filled by the payer. Payers who familiarize themselves with these boxes will discover that it isn't so complicated after all. Once completed, the payer must send a copy of it to the Internal Revenue Service and a copy to the paid individual.
This document should not be confused with a W-2 form or with the 1099-NEC. The 1099-NEC is used to pay freelancers and independent contractors. This is a recent change as a 1099-MISC was previously used to record payments to freelancers and independent contractors.
Completing and filing this tax form is easy. Simply fill in the appropriate boxes according to the definition of the boxes you learned about in this guide. Remember that you won't put information in every box. Once the form is complete, you'll send a copy to the person you paid, and you'll also send a copy to the IRS. The specific mailing address to send Copy A (you'll learn more about the various copies and to whom they belong in just a moment) to the IRS may differ according to the payer's location. It is advisable to refer to the Instructions for Form 1099-MISC. It may be more convenient for you to file electronically. For you to do that, you must have certain software that can generate a file according to the specifications found in Pub. 1220, Specifications for Electronic Filing of Forms 1097, 1098, 1099, 3921, 3922, 5498, 8935, and W-2G.
1099 has several "copies." Here's the right way to distribute those:
Copy A must be sent to the IRS. You may also need to send Copy 1 to your state's tax department. Copy B must be sent to the recipient. Copy 2 may also need to be used by the recipient for their state taxes, so make sure you give that to them. Finally, there is Copy C. It is for you, the payer, to retain for your records.
Filing due dates for 1099-MISC forms have also been updated for the 2020 tax year. The 1099-MISC must be sent:
In 2014, 91 million 1099-MISC Forms were issued by businesses. That's up by nine million since 2010. These 91 million documents represent individual contracts, not individual workers. In other words, since an independent contractor can, and often does, sign multiple contracts in a given year, there aren't 91 million Americans working in the gig economy. The figure does, however, indicate the scope and upward trend of freelance work in the current American economy.
Rather than the standard W-2 Form, freelancers receive 1099-MISC Forms. A 1099-MISC is the W-2 equivalent for anyone who works for themselves.
As a standard employer or employee, taxes are relatively simple. Employers submit a W-2 to an employee, and the employee uses the W-2 to fill out either a 1040-EZ or a 1040-A tax form. For freelancers, and employers who contract with them, tax filings are more complex for two reasons:
All freelancers that take home more than $600 and any business professional involved in an industry that employs freelance work, which pays out more than $600 per year in contract work, will find useful information in this guide. Think of it as your digital handbook to freelance tax information.
We think of this guide as a digital post-it note for freelancers and their employers during tax season. It offers detailed instructions on completing and filing the main tax forms. Use this guide to educate yourself well in advance of tax season so you can properly and efficiently file your taxes come April.
A Tax Guide for Independent Contractors and the Companies Who Hire Them is a go-to resource for all freelancers and their employers, co-authored by Justin Gomer and Jackson Hille.
Justin Gomer is a Lecturer at the University of California, Berkeley, and soon to be author of two books. Jackson Hille is a Content Manager at FormSwift and the 2013-14 Departmental Citation Recipient in American Studies from the University of California, Berkeley.
This guide considers both sides of the employer/contractor relationship and provides an informative breakdown for both parties, so that when taxes are due next year, you have a single resource that prepares you to submit all of the requisite paperwork with your accountant or tax filing service. In other words, whether you are an employer or freelancer, this guide is your one-stop shop come tax season.
According to the IRS, the distinction centers around three variables:
If you plan to hire a vendor for contract work over $600, request a W-9 Form from the vendor beforehand. By incorporating this into your hiring protocol for contract work, you'll get an early start on collecting required information—such as the contractor’s mailing information and Tax ID number—for the subsequent creation of the document.
Requesting a W-9 in advance will also enable you to avoid the complex scenario of backup withholding, which requires you to set aside 28% of the payments you paid to another person if you do not have their tax info during filing time.2
This is an important question for both businesses and contractors. While we explained this earlier in the guide, it’s important to reiterate this information so that it is used at the right time. The key is to remember the “600” rule is: businesses must issue it to anyone that is paid $600 or more in “rents, services (including parts and materials), prizes and awards, or other income payments.”1 A contract that totals less than $600 does not require one.
You must issue a 1099 to its recipient by January 31st of the year in which you are filing your taxes. For example, a 1099 for a contractor that worked with you in 2015 must be issued to the contractor by January 31, 2016. Additionally, you must send the red copy of it to the IRS by the last day of February by mail, or by March 31 if you are doing so electronically.
It should be sent to any contractor you paid $600 to or more during a tax year unless they are a realtor. You also use it to report the value of prizes and awards if they are worth $600 or more.
As a freelancer, you do not generate your own 1099. Instead, the company who contracted you furnishes the form in January of the year after you complete the contract. This means that if you contracted with multiple companies and made $600 or more from each company, you will receive multiple 1099s (one from each company). If you completed multiple projects with a single business and made more $600 or more, they will send you a single 1099 that includes all of the work you completed. Labor that amounts to less than $600 does not require a 1099.
Your responsibility, then, is to use the info from the 1099(s) you receive to complete your federal and state taxes and send in the appropriate copies to the IRS and the state along with other required income tax return documentation for your particular situation.
Freelancers are responsible for both self-employment and income tax. Generally, the amount of income subject to self-employment and taxes equates to 92.35% of your net earnings (net earnings = income - business expenses). While self-employment taxes are collected annually, income taxes are collected on a quarterly basis, due on the 15th of April, June, September, and January. However, how much you will pay in taxes will depend on how you’ve set-up your business.
Plan ahead and keep detailed records. Set aside money each month not just for your end of year taxes, but for your quarterly payments as well. Additionally, there are a number of write-offs for the expenses you incur—a portion of your mortgage/rent, utilities, home office, etc.—depending on how you structure your work. Keeping detailed accounting records of these costs will ensure you can minimize your tax burden at year’s end. So itemize all of your expenses and commit to a thorough system of record-keeping. Talk with a tax professional to learn the best ways you can minimize your tax liabilities.
Schedule C-EZ is primarily for writers and graphic designers that meet the following criteria:
Close to everything. Seriously. Here’s a list to get you started:
You will enter deductions from the list above in either Schedule A or Schedule C of your 1040. You’ll record items like interest paid, insurance expenses, and charitable gifts in Schedule A. Your expenses—vehicle, insurance, education, travel, events, home office, supplies, meals, etc.—will go in Schedule C.