How to fill out a 1099 form: What to know about working with US freelancers

More than 16 million people in the United States are self-employed—nearly 11% of the country’s workforce. With such a significant portion of the population opting to work for themselves, more and more companies are integrating freelancers and contractors alongside their full-time staff. As a result, the Internal Revenue Service (IRS) has evolved to keep pace, and Form 1099—and its various versions—plays a central role.

Learn what Form 1099 is, how to complete it, how to ensure you remain tax-compliant, and what’s at stake if you get it wrong.

What is Form 1099?

Form 1099 comes in 20 variations, each for a different purpose, like 1099-S for real estate transactions and 1099-DIV for interest or dividends. This guide concentrates on 1099-NEC, used for payments to freelancers or contractors, where NEC denotes "nonemployee compensation."

Form 1099-NEC is an official document, accessible online and in paper form, that businesses use to report compensation paid to independent contractors, freelancers, and other individuals not on their formal payroll. The IRS mandates that companies fill out and submit a Form 1099 for each freelancer or independent contractor who receives payments totaling more than $600 in any given tax year. This requirement is part of the IRS's efforts to ensure accurate tax reporting and compliance by businesses and self-employed individuals.

Before the 2020 tax year, businesses reported payments to freelancers and contractors using Form 1099-MISC. The shift to Form 1099-NEC aimed to reduce confusion and simplify reporting for companies.

Who do you need to complete Form 1099-NEC for?

If you operate a business in the U.S., you'll complete Form 1099-NEC for freelancers or other types of contract staff who are U.S. citizens or permanent residents and earned $600 or more in a single tax year, but aren't full-time employees on the payroll. 

For a quick look at who gets a 1099-NEC, consider the following types of individuals:

• Independent contractors: These experts in specific domains often work with multiple clients simultaneously and usually enjoy significant flexibility in managing their work hours and conditions.
• Freelancers: Freelancers also often engage in several shorter-term projects at once, but unlike contractors, their workload for any given client likely fluctuates significantly from month to month.
• Consultants: These professionals specialize in areas like management, operations, or finance and help provide solutions to support businesses in reaching their objectives.

How to file Form 1099-NEC

As an organization, you're responsible for accurate and compliant reporting to the IRS and for helping your freelancers, contractors, and consultants do the same. The following steps will help ensure a smooth process for everyone:

1. Gather all necessary information

This includes their legal name, address, and taxpayer identification number (TIN), which are typically outlined in the W-9 form they provided at the beginning of your partnership. Additionally, it’s imperative to precisely track the total amount each contractor earned over the tax year you're filing for.

2. Complete a separate Form 1099-NEC for each individual

For every independent contractor, freelancer, and consultant who received over $600 in the year, you’ll create a Form 1099-NEC (downloadable from the IRS’s website). In Box 1, enter the total payment made to the individual. Ensure the accuracy of your business details, such as the official name, address, and TIN, in the "payer" section of the form.

3. File Copy A with the IRS

The deadline is January 31 of the year after the tax year in question—for example, Copy A for payments made to a contractor in 2023 is due no later than January 31, 2024. The preferred method for this is electronically through the IRS FIRE system. You might also be required to file Copy A with your state.

4. Send Copy B to each individual

The deadline for distributing copies to your contractors or freelancers is also January 31. This copy is for their records and aids in their personal income tax submissions to the IRS. You may deliver it digitally, with their prior agreement, or via mail.

5. Keep Copy C for your records

Maintaining these records is vital for addressing any future discrepancies or if your business undergoes an audit. Accurate Copy C documents makes proving you did your part to ensure compliance—if necessary—much easier.

What happens if you don’t file a 1099?

Filing incorrect or late Form 1099s can lead to several problems for your business, such as financial penalties, operational disruptions, and reputational damage, which collectively could hinder your company's growth and success.

1. Financial penalties: The IRS enforces fines that escalate over time. Initial penalties are $50 per form submitted up to 30 days late, $100 for each form filed afterward but before August 1, and $260 for each form filed after that.
2. Operational disruptions: Handling IRS notices and penalties goes beyond financial implications—it also demands considerable time and resources that divert focus and resources from your business's primary objectives. Also, persistent noncompliance can lead to audits, which adds another layer of administrative demands on your team.
3. Reputational damage: Compliance issues might also tarnish a business's reputation with contractors and regulatory bodies. Delays in delivering Form 1099 to your collaborators can lead to tax filing difficulties for them, potentially straining your professional relationship.

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