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May 24, 2024

What is a 1099 Form?

A 1099 form is an essential tax record that reports a taxpayer’s non-employment income. See how the 1099 works and why you need to know about it.

What is a 1099 Form?

Akhil Reddy
February 10, 2022

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Form 1099 is an information return that reports a taxpayer’s non-employment income earned throughout the year. Who’s responsible for filing it? And how? Here’s everything you need to know about the 1099 Form.

1099 form cheat sheet: what you should know

  • All contractors, freelancers, and consultants who earned more than $600 from a single business should receive a 1099. Employees, whether hourly or salaried, do not receive Form 1099.
  • The business that hired and paid the contractor is responsible for issuing the 1099. As the payer, you’re responsible for filling out the 1099 and sending it to the contractor. Individual taxpayers are not responsible for completing 1099s.
  • There are 20 different variations of the 1099 Form. However, all 1099s serve the same purpose: to report non-employee income to the IRS.

What is a 1099?

Form 1099 is a tax document used to report certain types of income - this could include money from tax dividends, IRA distributions, state tax refunds, interest income, prize money, the sale of personal property, or credit card debt forgiveness. Each type of income is reported on a variation of Form 1099.

Businesses are most likely familiar with the 1099s that are issued to independent contractors - Form 1099-NEC. 1099-NEC states the amount of non-employee compensation a taxpayer has earned throughout the year.

Important Note: In 2020, the IRS rolled out the 1099-NEC to report money paid to people who provided a service but were not employees. The 1099-NEC replaced Form 1099-Misc for self-employed individuals.

Who files Form 1099?

Employers and financial institutions are typically responsible for completing 1099 forms. Any company that hires a contractor, freelancer, consultant, or other self-employed person and pays them $600 or more is required to fill out a 1099-NEC.

Since a 1099 is a record of non-employee compensation, anyone who has made money through a side hustle, small business, or as a freelancer receives a copy of this form from the paying client.

Who doesn’t get a 1099?

Usually, if a company paid a self-employed person $600 or more in non-employment income, they would file and send a 1099. However, there are instances where the employer does not need to send a 1099.

Corporations don’t need 1099s

Most independent contractors that you come across will be registered as a sole proprietor or limited liability company (LLC). However, in the rare case that the contractor is registered as a C corporation or S corporation, they do not need Form 1099.

To find out if a contractor is incorporated as a C corp or S corp, you can check their Form W-9. Companies should request a W-9 as soon as they hire a new contractor.

Freelancers found via marketplaces

If your business uses marketplaces like Fiverr, Upwork, or Outsourcely, you don’t have to worry about providing1099-NEC forms to the freelancers hired through these platforms. These platforms are considered payment settlement entities, which means they’ll take responsibility for filing Form 1099-K to freelancers that earn over $20,000 and have over 200 transactions.

Employees need W-2s

As an employer, you should have a clear understanding of who’s an employee and who’s a contractor. This isn’t just for the ease of filing forms; the IRS has strict rules that define an employee versus a non-employee. Business owners sometimes try to misclassify workers as independent contractors to avoid paying medicare and social security taxes. However, the IRS imposes harsh penalties for businesses that do this.

Make sure to file Form W-2 to report wages, tips, and other compensation paid to employees throughout the tax year.

Difference between a 1099 and aW-2

The main difference between a 1099 and a W-2 is that a 1099 is issued to contractors who then report their income to the IRS and pay their own taxes; a W-2 is sent to an employee to report their income and the withheld payroll taxes.

Employers must file W-2 forms, also known as Wage and Tax Statements, for each employee that had income, Social Security, or Medicare taxes withheld from their wages. Keep in mind that W-2s are separate from W-4s, which are used to indicate to employers how much tax to withhold from an employee’s paycheck each pay period.

W-2s are essential for determining whether a taxpayer will get a refund or need to pay taxes when they file their taxes.

What are the different types of1099s?

There are several types of 1099 forms to account for the various types of non-employment income. Here are a few of the more common types of 1099s that you may run across.

1. Form 1099-NEC

The IRS released the 1099-NEC in 2020 as a way for employers to report income paid to non-employees. Prior to the 1099-NEC,employers used Form 1099-MISC.

2. Form 1099-MISC

Form 1099-MISC is the catch-all form for income types that don’t fit into other 1099 categories. The most common type of income that you might use this form are prizes and awards.

3. Form 1099-INT

If a customer earns more than $10 in interest from a bank, credit union, or another financial institution, they’ll receive Form 1099-INT.

4. Form 1099-DIV

Form 1099-DIV reports dividends received. However, this doesn’t include dividends on share accounts at the credit union. Those would appear on 1099-INT.

Self-employed folks need 1099s to file their taxes - but if you hire globally, different rules may apply

What you just read above applies to hiring contractors and freelancers in the United States. But if you want to hire globally - and open up your talent pool - there are different rules to follow.

That’s what Thera is here for.

Thera allows you to automate your global payroll process so you don’t have to worry about the nitty-gritty of payroll taxes and IRS forms like the 1099-NEC. Thera also handles the administrative compliance rules — both in the United States and abroad. We’ve spent tens of thousands of hours researching and building this stuff and would love to show you how Thera works.

If you’re building a team that hires employees around the world, we can help. Learn more about what we do by heading here.

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Elizabeth Wellington

Liz writes about business, creativity and making meaningful work. Say hello on Twitter or through her website.

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