There are several ways to take advantage of 1099-NEC deductions, and they’re not all related to independent contractor work. Let’s discuss the various deductions that can be recorded on Form 1099-NEC.
The Main Deduction: Non-Employee Compensation
1099-NEC was recently reinstated in the tax code and process to differentiate non-employee compensation more clearly. If our business paid an independent contractor or freelancer more than $600 during the tax year, you have to give the correct W-9 information to those non-employees so they can use them for their 1099-NEC deductions and reporting.
If you are an independent contractor or business that was paid for the work and you are using the 1099-NEC to report your earnings to the IRS, you may also be eligible for the qualified business income deduction. This deduction allows you to take a 20% deduction on pass-through income.
Breaking Down Non-Employee Examples
Often, when we mention freelancers or independent contractors, a few specific businesses or individuals come to mind: freelance photographers, writers, marketers, and the like, or contractors that include those in the construction or consulting fields.
While all of these roles can describe the people you paid for labor who weren’t direct employees of your business, that’s just the tip of the iceberg for 1099-NEC deductions and business relationships.
Types of Businesses, Products, and Services Eligible as Non-Employee Compensation
Non-employee compensation is used for tax purposes to classify any wages or payments made to those who did work for you or your business – either for a specified temporary basis or for a defined project. Non-employees are typically independent contractors, freelancers, sole proprietors, and self-employed individuals.
These can be creative or marketing consultants or freelancers. Some examples of this include things like:
- Paying a copywriter or editor for their work on monthly blog articles posted to your website
- Commissioning a graphic artist to create or update your business logos or website
- Partnering with a web designer or IT professional to develop an app for your business, either as a sales module or a promotional or companion service or product for your customers to enjoy
- Replacing a design or marketing team with an independent contractor based on labor shortages or staff changes
- Partnering with third-party vendors to offer or augment your business’s proprietary services
- Hiring a marketing consultant to do market research and help you refine or create a product or service line
Non-employee compensation can also include the use of industrial or construction-based contractors like:
- Hiring a team to expand your office building
- Hiring contractors to resurface the parking lots
- Contracting with a maintenance service that periodically cleans or exterminates in your business spaces
- Hiring a decorator or interior designer
- Paying a construction or renovation company for remodeling services
You can also create opportunities for 1099-NEC deductions if your business paid legal feels during the tax year in question. Whether you just had them on retainer, needed help navigating city or business laws, or had them draft disclaimers or other legal copy for your website, brand, or other purposes. Please note: only fees paid directly to the attorney are listed on the 1099-NEC – other proceeds like settlement payments should be reported on box 10 of the 1099-MISC.
Non-employees aren’t always the individuals and freelancers you worked with once this year and then called it quits. Many continuing partnerships with a business or individuals that perform work for your business can be classified as receiving non-employee compensation from your business.
Non-employee compensation can also include things like sales commissions, awards, prizes, and payments for specific tasks or projects upon completion.
Benefits of Using Non-Employees
You may be thinking, “Why would I hire someone as a non-employee if my business consistently needs their services? Why not just add someone to the payroll?”
And the answer to that question is: it depends. Of course, you can run a business by only using independent contractors, or you can do it with all in-house employees. But the benefits of freelance and independent workers are clear.
You can navigate labor shortages (like the ones the whole country has been experiencing recently) without loss of productivity. You can use those freelancers as often or as sparingly as you need – you don’t have to worry about making sure they have enough work to do to fulfill their in-house part- or full-time contracts and hours.
And you can more easily pivot by choosing new freelancers, contractors, or vendors any time – hire more when you have a big project, stick with your favorites for consistent, high-quality work, and call them when you need them – whether that’s a few times a month or once every five years.
Another benefit of leveraging independent contractor and freelance resources is the cost – you don’t have to spend as much time and money managing or employing these niche individuals if you don’t have enough work for them. Most often, hiring an independent contractor will be cheaper than hiring a full-time person for the job. This is true even with essential roles in your business, like marketers, copywriters, IT staff, and so much more.
1099 Form Filing Just Got Easier
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Our all-inclusive service starts at just $3.50 per recipient. Whether you partner with one independent contractor or one thousand, we can help you keep your non-employee compensation finances straight.
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