The vast majority of the workers in the United States will never come across a 1099 form. That is because they earn their primary income through valid employment. They go to work for 40-50 hours a week and cash a check, then receive a W2 at the end of the year.
However, between 6.9% and 9.6% of all workers are designated as independent contractors. That is roughly 10-15 million individuals working as freelance writers, ride-sharing providers, delivery drivers, and consultants earning a significant amount of money that still need to file taxes at the end of the year. These workers will receive a 1099 form.
What is the 1099?
The 1099 form is a record that you received payment from a business entity or person. These payers fill out the form and send copies to you and the IRS. This is an “informational return” that reports all income from self-employment, interest and dividends, sales proceeds, and other categorized miscellaneous income.
That means there are a bunch of different designations depending on the income earned that will result in different taxable rates or categorizations for what deductions are applicable. If you are a small business owner, you will need to issue these 1099 forms to any independent contractor you paid more than $600 to for the year.
Can I Get a Penalty if I Don’t’ Issue a 1099?
Yes! The good news is the penalty is not that high. Most small businesses do not have that many independent contractors. You can expect to pay around $50 – $100 per unfiled form with a maximum amount of $500,000 for those businesses using a significant number of 1099 workers. If the IRS determines you intentionally meant to disregard this form, the penalty goes up to $250 per form.
The good news is it takes minimal effort to file this form. Keeping on top of your bookkeeping software or agent ensures you can issue all your 1099s by January 31 or February 28. The earlier you issue these forms, the better. The government wants to make sure individuals who need 1099s are able to file their own taxes on time.
Most bookkeeping software will have a PDF form you can fill out and then issue electronically and physically to all your contractors. Your bookkeeper will probably download them from a government resource and then mail them on your behalf as long as you turn over earnings data on time.
Are all 1099s the Same?
No, and this is important to point out. In most cases, you will see the 1099-MISC or 1099-NEC to pay independent contractors for any work they have completed for you during the year. The 1099-NEC is a new form vehicle the IRS created in 2020 and will be seen more frequently starting this year.
Other 1099 form variants include:
- 1099-A – canceled debt from mortgage or short sale of home
- 1099-B – income from the sale of securities
- 1099-C – settled credit debt
- 1099-CAP – corporate capital restructuring income
- 1099-DIV – income from dividends
- 1099-G – money from state, local, or federal government
- 1099-INT – more than $10 of interest from a bank, brokerage or other financial institution
- 1099-LTC long term care insurance pay out
- 1099-OID – discounted bonds or other financial instruments
- 1099-PATR – patronage dividends from a co-op
- 1099-Q – money received from a 529 educational account
- 1099-R – distributions form pension, retirement plan, profit sharing, IRA, or annuity
- 1099-S – real estate closings
- 1099-SA – health savings account distribution
Each one of these forms has subtle nuances, but those designations give you a basic idea of what the purpose is in general.
Why Use a 1099 Contractor Instead of a W2 Employee?
There are actually quite a few benefits to not having a lot of employees. For one, you do not have to provide employee taxes like Medicare and Social Security. For the other, you also do not have to deal with any reportable perks like employee health insurance or pension plans.
That is why 1099s are becoming more common. Businesses do not want to deal with the hassle of having a large group of employees to manage on paper. You do want to be extra careful in this regard. If you manage any of the methods a worker uses to perform their job duties for you, you run the risk of a judge declaring them employees. This could result in significant fines and back pay of benefits they never received.
Always work out your worker designations ahead of time to avoid any conflict. Talk with a qualified bookkeeper first to make sure you are following the local, state, and federal guidelines appropriately, and you should be all set.
