Freelance 1099 Tax Considerations

NEW FOR 2020: Non employee compensation that used to go in box 7 of the 1099-MISC now goes into box 1 of the 1099-NEC

Here is basic 1099-NEC, 1099- MISC and 1099-K information that freelancers may find useful for your tax filing.

1099-NEC General Rule

  • General Rule : If a supplier or vendor is paid $600 or more in aggregate in a year for:
    • Services (including expenses and materials) for nonemployee compensation
    • Any payments to Attorneys
    • Payments where there is backup withholding

Then the payor business is required to give a copy of the form to the payee by 1/31 (2/1 in 2021 for 2020) and to the IRS as well by this date.

                                                   1099-MISC General Rule

  • General Rule : If a supplier or vendor is paid $600 or more in aggregate in a year for:
    • Rents (unless paid to a real estate agent)
    • Prizes or Awards that are not for services. Those that are for services should be reported on a W-2
    • Other income payments

Then the payor business is required to give a copy to the payee by 01/31. The IRS must have this form by 3/1 if filed on paper or 3/31 if filed electronically.

 Who Must File the 1099-NEC or 1099-MISC?

Many Businesses need to file 1099-NEC or 1099-MISC each year.

Note:  The 1099-NEC and the 1099-MISC are for payments made by a trade or business only; you do not need to do either for personal payments.

                                                      Schedule C 1099-NEC or 1099-MISC Questions

The 1040 Schedule C contains the following two questions:

1 Did you make any payments in 2020 that would require you to file Form(s) 1099? (see instructions)

2 If “Yes,” did you or will you file all required Form(s) 1099s?

Essentially you are auditing yourself when you sign the tax return. Answering these questions incorrectly can lead to significant penalties.

Vendor Exceptions for Filing 1099-NEC or 1099-MISC

There are exceptions for the following vendor types:

  • Corporations such as Corp /P.C. /Inc.
  • Tax-exempt Organizations.
  • Government entities.

Filing is required for all others such as:

  • LLCs An LLC is a limited liability company. It is not a limited liability corporation.
  • LLPs
  • All Attorneys
  • Co.
  • Ltd.
  • Sole proprietors

 1099-NEC and1099-MISC Payment Type Exemptions

There are exceptions for the following payment types:

  • Payments made with a credit card or other payments covered by 1099 K are exempt.
  • Filing is required for all others such as:
    • Checks
    • Cash
    • Wire Transfer
    • Bartering of Services

1099-NEC or 1099-MISC Penalties

Congress has increased the penalties for non-compliance.

  • Failure to File Correct Information Returns (with the IRS) by the Due Date (Section 6721)
    • $50 to $280 for each late, incompletely filed, incorrectly filed or missed 1099 to IRS depending on when the form is filed
    • At least a $560 penalty for intentional disregard of payment statement requirements.
  • Failure to Furnish Correct Payee Statement (with the IRS) by the Due Date (Section 6722)
    • $50 to $280 for each late, incompletely filed, incorrectly filed or missed 1099 to IRS depending on when the form is filed
    • At least a $560 penalty for intentional disregard of payment statement requirements.

These are separate penalties and can be charged for the same 1099.

 1099-NEC and 1099-MISC To Do List

What to do:

  • Go through your financial records and make a list as to which vendors are to be given a 1099-NEC or1099 MISC.
  • Send vendor a current W-9 to fill out. You must have the vendor’s name, address, and tax ID. This information must be current. Copying information from an invoice may no longer be correct or sufficient backup for the IRS.
    • PENALTY PREVENTION TIP: Ask vendor to complete and send you a completed W-9 along with vendor’s first invoice. This way you will have the vendor’s information including the Social Security number or the Employer Identification Number without which you have to do 24% withholding.
  • Here’s a link to a current W-9: https://www.irs.gov/pub/irs-pdf/fw9.pdf
  • If you do not have the correct taxpayer identification number, you are supposed to withhold 28% of the payment for backup withholding.
  • Contact Susan Lee, EA, CFP immediately for assistance if you want help preparing the 1099’

 1099-K  – Merchant Card and Third Party Network Payments

  • If you accept credit cards or payments online, you will receive a 1099-K from each processor:
    • Visa/MasterCard
    • Amex
    • Discover
    • Paypal
    • Google

These should be provided to you by 01/31. In order that your income be correctly  reported, add up all 1099’s that you received for sole proprietor income or rentals and all income for which you did not get a 1099 and give this information to your tax preparer.