The number of freelancers has increased greatly in the United States, and in a few years, can reach half the total working population. More and more business owners turn to hire freelancers as reducing the number of full-time employers allows them to cut down on rent, insurance, and salary expenditures. However, no matter whether you are an independent contractor or an employee in a business entity, you must report your annual income to the IRS (Internal Revenue Service), which aims to calculate and collect different tax types from individuals and enforce tax laws in the United States. Besides personal income taxes, the agency collects gifts, employment, corporate income, and estate taxes.
We encourage you to read the information below to educate yourself before the IRS imposes taxes on you and to report accurate information about your income to the agency most effectively. The information in the guide mainly relates to the 1099-MISC Form and requirements concerning the document.
Form 1099 for Miscellaneous Income is a legally-binding tax document commonly used in the U.S. This document is different from other tax forms as it is completed and sent by a business proprietor to a person who is not on their payroll. It takes place if the former has paid royalties in an amount up to more than ten US dollars or at least 600 US dollars for other income payments. The traditional list includes but is not limited to the following types of payments one receives. It is equal for a business owner and another individual as well:
There are other income payments one should report to the IRS if they exceed or equates to the above-mentioned amount. Nevertheless, even if an independent worker, such as a freelance translator or writer, receives less, they must not conceal their income from the agency and the local tax department.
Keep in mind that there are payments for which you do not need to issue the form: services that are not related to business. For example, if you hire a babysitter to look after your infant or a housekeeper to take care of your place of residence, you are not required to fill out the form. All these activities do not presuppose getting any benefits or profit, and that is why they do not require that you should report the payments. However, if you pay a housekeeper 700 US dollars to run houses that you lease to renters to profit from them, filling the form containing the information about the payment is mandatory. Besides, if you receive services from real estate agents or sellers of goods, filling out the form is unnecessary.
The 1099-MISC form is often confused with the Form W-2 as these two documents serve similar purposes. Before you decide which form you need to issue, you should classify your workers correctly. There are employees who are officially on your staff and from whose payments you are to withhold payroll taxes and independent contractors over whom you have less control and who remain more or less autonomous with a flexible schedule.
Once you have determined for whom you need to draft the document, you can choose the suitable form. Remember that if you decide to report payments to a freelancer, or independent contractor, you normally need to use the form under discussion, which comprises information about the gross amount of money paid to a person who provided services during the past year.
For each employee, you, as an employer, should provide the form W-2, which allows you to present annual taxes withheld from their paychecks at the end of the year. The form is also referred to as the Wage or Tax Statement. The minimum amount of annual income is the same as the income required for the 1099-MISC. The information that one needs to include in the form contains personal employer’s details, such as legal name and ID number, the company’s EIN (Employer’s Identification Number), the total amount of the employee’s earnings and taxes, both state and federal ones.
Ensure that you have identified your worker’s status in the company correctly and filled out the necessary form. If you still have questions regarding the forms, visit the official IRS website to find out more about the differences in structure and filing requirements.
All the instructions and rules regulating the procedure and the relevant updates are listed on the official website of the Internal Revenue Service so that you can check them out at any time convenient for you. The IRS allows you to access the information to prevent you from delaying or skipping submitting the document.
If you fail to file the document with the agency due time, there is a risk of getting penalties for delay or incorrect information. The sum you can be fined depends on how many days you delay sending out the form. It starts at 50 USD per information return. Keep in mind that the form is supposed to be sent out by the deadline of January 31st.
Form 1099-MISC is usually sent in PDF format. At the beginning of the form, there are instructions regarding the procedure of filing this document. The form itself contains information about each detail both parties should provide so that they are unlikely to miss something out. The sections in the document normally include the following details:
It is also worth noting that the file consists of five copies. Each of them is to be distributed differently. The first copy (Copy A) is typed in red ink and is meant only for the IRS use. It means that you must not print it out. The “A” copy’s paper form is usually accompanied by 1096, giving information about the information return.
The other copies of the form are written in black, so you are allowed to print them. Copy 1 is usually sent to the freelancer’s state tax department. The recipient gets Copy B, while the payer is given Copy C. In some cases, Copy 2 is used by the recipient for state taxes. The employer provides all the afore-mentioned copies to an independent contractor and sends the necessary one to the IRS.
The form is not very difficult to fill out once you have understood the basics of its creation. We hope that our form-building software will help you generate the relevant PDF file. If you have many forms to send out to the agency, you are welcome to do it electronically via email. However, to give the copies to your independent contractors in this way, you should get their consent. In case they object to receiving the document electronically, print it out for each worker.
The form contains a great number of boxes that can make the process rather challenging. However, each box has inscriptions indicating what details you should insert in each box. To create a correct file with precise information, read our step-by-step instructions below, and be attentive.
Step 1. Insert the Payer’s Personal Info
Like any other tax form in the U.S., this one starts with the personal information about the two parties (the payer and the recipient). Therefore, the first thing you need to do is fill out the section indicating who has paid the written amount of money to a freelancer or independent contractor. This party should write their legal name and residential address. The address (written in the following order: city, state, county) should be mentioned along with its ZIP code. The payer must input their phone number in case they need to be contacted in the future.
Step 2. Insert the TIN
In the next two boxes, the parties must write their taxpayer identification numbers. The box on the right should be filled out by the payer, while the left section is meant for the recipient. The number contains nine digits. The number “9” goes the first.
Step 3. Identify the Recipient
Below the two boxes with the taxpayer ID numbers, there is a large box similar to the first one (the payer’s info), in which the recipient is to insert their personal details. Unlike the first one, this section is divided into three parts. The first part is devoted to the recipient’s legal name; the second one — to their street address, which must include the apartment number. Finally, the third part in the section requires that the recipient add their full physical address (city, state, county, and ZIP code).
Step 4. Write the Account Number
You will see the section that must be filled out below the previous box if the payer has more than one account number for the recipient. The recipient must indicate what account number was involved when making the payment.
Step 5. Check the Box
The two sections next to the box “Account Number” require you to select the box if necessary. The first one is called the FATCA filing requirements. To find out when you need to check it, read the instructions in the official form. The second box is for the second TIN. It is selected if the payer is informed two times that the recipient’s TIN was inserted in the wrong way.
Step 6. Enter the Income
Boxes 1-17 indicate the total amount of payments for different types of service and income. Each box is meant for one type of income (including rents, royalties, medical services, prizes). Some of the boxes indicate the amount of income tax (either federal or state) withheld. Boxes 16-18 are related to state information, which is not necessary to be inserted by the payer.
Step 7. Distribute the Copies
As we have mentioned earlier, the official document has several copies, each meant for a particular organization or individual. Do not forget to send the first copy that is colored red to the IRS. You, as the recipient, leave Copy B to yourself. The payer receives Copy C. The other copies are supposed to be submitted to the state tax department.
One thing you should avoid is delaying filing your form. Submitting the form at due time can prevent you from penalties. According to the instructions in the form, the payer must ensure that the IRS receives Copy A of the document by March 1, 2021, if you file it in a paper format. You have additional 30 days to send it via email. There is also a due date by which the recipient must get the form — by February 1, 2021. If payments are related to substitute one instead of dividends or gross proceeds to a lawyer, you, as a payer, will have a right to send Copy B to the recipient by February 16, 2021.
Yes, you can. Although the agency allows it to be handwritten, you must avoid cursive letters as they can be hard to read. The most efficient way to complete the paper in handwriting is to write in block capital letters. However, we recommend you to fill out the paper online as you can correct typos immediately and ensure the details’ accuracy.