36% of freelancers do so full time – this is an 8% increase from 2019. How does hiring more freelancers affect your taxes? The freelancing industry in the U.S. is now a $1.2 trillion economy. This was a rising trend before the coronavirus pandemic hit, but now that it’s here and sticking around for a while, the push towards freelance and remote work has accelerated even more. Do you work with freelancers currently? Are you considering working with freelancers at an increased rate or for the first time this year? If the answer is yes, your tax filing process will likely be changing this year. Freelancers, when filing their own taxes, are often taught to think of themselves as their own business. But what does that mean for your business’s taxes when you hire them? The addition of the form 1099-NEC has changed the way businesses that hire freelancers and independent contractors will report those payments in the tax year 2020. Let’s go through some common changes and misunderstandings. What is a Freelancer or Independent Contractor? Your employees, freelancers, independent contractors – they all work for you, so why aren’t they all treated the same from a tax filing perspective? The big difference is in the relationship to your business. Employees (whether full- or part-time) have their income taxes withheld or matched by their employer: independent contractors and freelancers, since they are considered a separate entity, must set that money aside themselves. The hiring company or business does not do that for them. Freelancers also often set their own hours, use tools they purchased or acquired themselves, complete their work in whatever way they prefer, and they can also refuse work. Full employees are not able to do these things without approval from your business managers or supervisors. Do you need help filing as a freelancer or independent contractor? Check out this blog post instead. What Tax Forms Are Needed? At the end of the year, …
IRS Publication 1220 and How It Affects Your 1099 Filing
The IRS released Publication 1220, which says the 1099-NEC will not be included in the IRS 1099 Combined Federal/State Filing Program. Publication 1220 from the IRS is a recent and detailed announcement about the “Specifications for Electronic Filing of Forms 1097, 1098, 1099, 3921. 3922, 5498, and W-2G”. While you may not wish to read the full, 162-page PDF, some important new information has been shared about how to file the new form 1099-NEC. Publication 1220 “helps employers and tax professionals understand the specifications for filing certain information forms electronically with the IRS, including the requirements under the Combined Federal/State Filing Program (CF/SF),” as reported in this Forbes article. Federal and State Filing of 1099-NEC For 2020, the CF/SF Program has a list of which 1099 and other forms can be filed electronically. A key part of this program is the ability for these federal returns to be forwarded automatically to participating states, simplifying and streamlining the federal and state filing process. According to Publication 1220, however, the 1099-NEC is not among the approved forms. This means it’s on the individual business to make sure these forms are submitted to the state by the January 31 (or in 2021’s case, February 1) deadline. Past Payments Still Need to be Filed Under Form 1099-MISC In the past, those who filed the 1099-MISC were able to take advantage of the CF/SF Program. With that in mind, any non-employee compensation you report that took place prior to the tax year 2020 – say, if you forgot to report a 2019 payment or compensation – will need to still be reported on a 1099-MISC, which is a part of the CF/SF Program. 1099-NEC Filing Extension Another new change for the tax year 2020 is the process for requesting a filing extension on these forms. Publication 1220 says “a request for an extension of time to file can be submitted on paper form 8809.” Filing this paper form is simply a request for a …
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1099-MISC and 1099-NEC Mistakes and How to Avoid Them
With the introductions of the 1099-NEC for the 2020 tax year, there are many common 1099 filing mistakes, but they can be easily avoided with some research and planning. 1099-MISC and 1099-NEC Common Mistakes One of the common mistakes that we’ll see a lot next year is the confusion about which 1099 form to use, MISC vs. NEC. The MISC form is largely unchanged, but the non-employee compensation will now be reported on the NEC form instead. This includes all the payments made to independent contractors for services and products related to that service. Next to completing the wrong form, not verifying the TIN (taxpayer ID number) is another easy mistake to make. This will cause all IRS reporting to be off, often resulting in penalties that a business, its contractors, or both may have to deal with. Filing a paper return, while not inherently a mistake, may result in late fees and penalties if the number of forms filed exceeds the IRS limit of 250. This count is per form, so you can file 10 1099-MISC and 130 1099-K forms with no trouble, but if there are 265 1099-NECs, the NEC forms must be e-filed. If you find yourself making any of these mistakes, it might be good to figure out what the filing penalties are and how to correct the issues. If there are errors in your 1099 forms, click here to learn how to correct them. How to Avoid Them Many of these mistakes can be avoided by doing some research about the different forms and their due dates. Double-check all information you will be reporting, especially the TIN. Having a professional individual or service look over your 1099s can also be a cost-effective way to avoid common 1099 filing mistakes and ensure all your forms have been filled out and submitted correctly federally and by state. If you think e-filing these forms is confusing, eFile360 can help. For more information about electronic filing, sign up for a free eFile360 account. …
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Who Fills Out the New 1099-NEC
Independent contractor payments that were previously recorded in Box 7 of Form 1099-MISC will now be reported in the renewed 1099-NEC form starting in the tax year 2020. But who fills out 1099-NEC forms? What Businesses Need 1099-NEC Any business that pays out non-employee compensation to any contract labor for more than $600 in the taxable year must fill out a 1099-NEC by January 31 so that the contractor can file it with their taxes after that. There are a few different payment types that fall under non-employee compensation: fees, commissions, prizes, awards, and other forms of compensation for services. Some examples of compensation that qualifies for 1099-NEC reporting include the following circumstances: Professional service fees – to attorneys, accountants, architects, contractors, engineers, etc. Payments for services like parts or materials used to carry out the services Director’s fees and other remuneration (i.e. payment) Does the Contractor File or the Business That Hired Them? The business that hired the contractor is responsible for the 1099-NEC, but it is the responsibility of the contractor to prepare and send a W-9 form prior even to paying the contractor so that the hiring business has all the proper records to accurately prepare and file the 1099-NEC. The hiring business prepares and sends the 1099-NEC form to the IRS, with copies going to the independent contractor and the state tax department, if applicable. The independent contractor will need to record all information on the W-9 they send with the rest of their tax documents. Who Qualifies for an Extension? Businesses who need an extension must file a paper request. The following reasons will have their request granted/approved: The person or business who is filing suffered a “catastrophic event in a federally declared disaster that made the filer unable to resume operations or made necessary records unavailable” Operations were affected by the death, …
Types of 1099s and When to Use Them
The most common 1099 forms are 1099-MISC, 1099-INT, 1099-DIV, 1099-K, 1099-B, 1099-G, and 1099-R. There are more than a dozen different types of 1099 forms, each with a different purpose and importance. Let’s run through each 1099 form and what they’re used for. 1099-A This form is for Acquisition or Abandonment of Secured Property. This is typically used when property has been transferred due to foreclosure. 1099-B This form is for Proceeds from Broker and Barter Exchange Transactions. It is used by brokerages and barter exchanges to record customer gains and losses in a tax year – stocks, commodities, regulated futures contracts, foreign currency contracts, forward contracts, debt instruments, options, securities futures contracts, etc. 1099-C This form is for Cancellation of Debts. Lenders and creditors file this form if a debt of $600 or more has been canceled. 1099-CAP This form is for Changes in Corporate Control and Capital Structure. This form is used to report shareholders who have received cash, stock, or other property through an acquisition or other significant change in structure of capital. 1099-DIV This form is for Dividends and Distributions. You must file this form if you own stock or securities and receive more than $10 in distributions like dividends, capital gain distributions, or nontaxable distributions paid on stock and liquidation distributions. 1099-G This form is for Certain Government Payments. Use this form to report unemployment compensation, state and local income tax refunds, agricultural payments, and grants that are taxable. 1099-H This form is for Health Coverage Tax Credit (HCTC) Advance Payments. This form is used to report advance payments of qualified health insurance payments for the benefit of eligible trade adjustment assistance (TAA), alternative TAA, re-employment TAA, or Pension Benefit Guaranty Corporation (PBGC) payees and their qualifying family members. 1099-INT This form is for Interest Income. …
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Filing 1099-NEC: Dos and Don’ts
The IRS has re-introduced the 1099-NEC form for reporting non-employee compensation in an effort to smooth out the reporting process for contract labor and other related costs. Here are some of the main dos and don’ts of filing 1099-NEC. Do: File 1099-NEC Forms for Non-Employee Compensation The IRS requires reporting payments that are: made to someone who is not your employee, made for services in the course of trade or business dealings, or payments over $600 for the calendar made to an individual, partnership, estate, or even sometimes a corporation. Some examples of this include professional service fees to attorneys, accountants, or architects, fees paid between two professionals, payments for services, even parts and materials, and commissions. Don’t: Report Exceptions These exceptions do not need to be reported: payments for phone, freight, telegrams, storage, or merchandise and the like and payments for a foreign government, tax-exempt organizations, tax-exempt trusts, and payments to governments at the federal, state, and local levels. Do: Verify Recipient Taxpayer ID One of the first things you need to do is verify each recipient’s taxpayer ID. In order to complete the 1099-NEC for your contract workers, you must also have a form W-9 given to you by each recipient. Don’t: Use Form 1099-NEC for Personal Payments A big thing to remember about the new 1099-NEC form reporting is: don’t use the form 1099-NEC to report personal payments. Do: Mind Your Due Dates When filing and submitting these forms, remember the due date to distribute 1099-NECs to recipients is January 31 – though this date falls on a Sunday for 2021, so February 1 will be the deadline for the year. You must also be sure to file with the IRS by January 31 (again, February 1 for the year 2021). Don’t: Use Form 1099-NEC for Employee Wages In the same way that personal payments aren’t reported on the 1099-NEC, this form is also not for reporting employee wages. Make sure not to …