As your business grows, there may come a time when you need to hire an Independent contractor.
Independent contractors are different than employees, not only in the role that they will play within your business but also in how you would need to record and declare their payments to the IRS.
If you are unsure as to the difference between an independent contractor and an employee, you may want to read this blog first.
What are the IRS requirements for an independent contractor?
Once you determine that an independent contractor is the best fit for your business, you should get to know the IRS requirements that you will need to comply with.
If your business pays an independent contractor more than $600 over the course of a calendar year, the IRS requires you to complete and file a 1099-MISC form.
Your will need to complete a 1099-MISC form for every independent contractor that your business has used during the calendar year, reporting the total amount paid to them for their services in Box 7 (Non-employee compensation).
It’s important to remember not to include any business expenses within this figure, as expense reimbursements are not taxable. That is why when you set up your accounting, you should split between the fees for the services and expense reimbursements.
Why does the IRS want employers to complete 1099 forms?
We all know that completing 1099 forms can be a bit of a nightmare.
The reason why the IRS requires employers to take on this burden is so they can make sure that the independent contractors pay their share of taxes on their personal tax returns.
To ensure that the submitted personal tax returns declare the correct level of earnings, the IRS will verify it against all the 1099-MISC forms that have been issued for that social security number.
What is the deadline for filing a 1099-MISC form with the IRS?
It is important to note that 1099-MISC forms that have a non-employee compensation declaration need to be filed with the IRS by January 31st (for both paper and electronic versions).
You will also need to provide your independent contractors with a copy of the 1099-MISC form by January 31st to assist them in completing their personal tax returns.
What else needs to be reported on a 1099-MISC form?
Apart from payments to independent contractors, you will also need to report payments that exceed $600/year for the following:
- Rents (Box 1)
- Other income payments including prizes and awards (Box 3)
- Medical and health care payments (Box 6)
- Insurance proceeds (Box 10)
Are there any exceptions to the 1099-MISC requirements?
There are a couple of services that do not need to be declared on a 1099-MISC form.
- Payments of rent to rental agencies
- Payments for telephone, storage or merchandise
- Payments to tax-exempt organizations
- Payments to corporations, except for payments for legal fees – these are reportable as explained below.
What are the different 1099-MISC rules for attorneys?
While you need to include payment to attorneys on the 1099-MISC form, the IRS requires that you identify what the payments are for before you complete the form.
This is because general fees to an attorney, regardless or whether they are a corporation, must be entered into Box 7 like your independent contractors.
However, any payments made to attorneys which are deducted from the proceeds of a sale or settlement of a business or asset, needs to be entered into Box 14 instead.
Nipren 1099-MISC form Top Tip
Do not pay any independent contractor until you obtain a properly filled out W-9 form from them.
Please get in touch if you would like any assistance to ensure that all W-9 forms are properly collected, and 1099 forms are filed on time.