When most people hear a term like ‘1099 Tax Form’, their eyes glaze over and they start thinking about what’s for lunch.
However as a small business owner or freelancer, you need to understand the ins and outs of filing business taxes before tax time comes around.
In this article, we’ll break down everything you need to know about the 1099 Form. We’ll go through the different variations of this form, why you might need to file them, and when you should expect to receive them.
As a small business or freelancer, understanding 1099 forms is key if you want to avoid any trouble from the IRS.
What is a 1099 tax form?
Let’s start with the basics. The 1099 Form is used to report non-salary income to the IRS. There are 20 different types of 1099 Forms, but don’t panic! You won’t need to use them all.
For freelancers and small businesses, the most common 1099 Form is the 1099-MISC. If you or your business has paid an independent contractor more than $600 in a financial year, you’ll need to file a 1099-MISC.
The people who most commonly receive 1099 Forms are:
You can also earn income in other ways that are not freelance or contract work. Different forms of 1099 tax forms are used for different types of income.
Some examples of these other methods of earning include:
- Income from tax dividends
- Prize winnings & awards
- The sale of personal property
What is a 1099-MISC tax form?
A copy of this form will be sent to you by anyone who has paid you over $600 in a single tax year. Another copy will be sent to the IRS so they know how much you are being paid and how much they should tax you.
If you don’t receive a 1099-MISC from someone who has paid you over $600 that year, you should follow up with them and make sure they know it’s a IRS requirement. This form will also be helpful when you are filing your tax returns.
If you are a business that hired an independent contractor and paid them anything over $600 in a single tax year, you are required to file a 1099-MISC form.
Before you fill out and submit a 1099-MISC tax form, you need to have the following information from the contractor on hand:
- Their name (make sure it is their legal name and not just the name of the business)
- Their address
- Their Social Security Number or taxpayer-identification number
- The total amount you paid them during the tax year
The best practice for getting this information is by asking the person you’re paying to fill out a W-9 Form. This is an IRS official form that requests the information of a contractor.
Who needs a 1099 form from my small business
Small businesses and freelancers don’t just receive 1099 Forms. They also file them.
As a small business owner, you’ll most likely be filing a 1099 Form for wages and services.
You might have paid someone to build your business a website, or maybe you needed extra hands on deck during a busy period and hired an independent contractor. Whatever the case may be, if you paid this person over $600 you are required to file a 1099 Form.
Some other less common examples of when you might need to file a 1099 Form include:
- Commissions to salespeople who are not employees
- Reimbursement for expenses and bonuses
- Rent, prizes and awards
- Attorney fees
- Medical and healthcare payments
Other 1099 tax forms to know
The most commonly used 1099 Tax Form for small businesses is the 1099-MISC. However, there are other 1099 forms that may be relevant to you and your business. Check out some of these variations listed below.
The 1099-A Tax Form refers to the Acquisition or Abandonment of Secured Property. For business owners, this might apply to you if you borrowed money to buy a property for your business. If you do purchase a storefront or space for your business and that space is abandoned or foreclosed, you should expect to receive a 1099-A Form.
In rare cases, your small business might rely on a bartering system to secure services from a small party. If this is the case, you will be required to file a 1099-B. This form relates to ‘Proceeds from Broker and Barter Exchange.’
Another 1099 tax form that might be relevant to your business is the 1099-C: Cancellation of Debt. If you as a small business owner loan money, and for whatever reason, that debt is canceled or forgiven by the lender, this must be recognized as income. In this case, the lender who canceled the debt will file a 1099-C Tax Form.
With so many businesses moving to an online format, the 1099-K form is more relevant than ever. If you are an online retailer that accepts credit payments over the internet, you will most likely have to deal with 1099-K forms.
The purpose of this form is to make sure that credit card companies such as Mastercard and Visa, and third party processes such as Paypal and Amazon report the payment transactions they process on behalf of retailers. If you make sales online, you will probably get a 1099-K summarising your sales from these companies.
When you get a 1099-K form, you’ll want to check this against your own records. Using integrated e-Commerce or accounting software is a good way to make sure you always have a record of transactions on hand.
Is your business a corporation or a partnership? Then 1099-CAP forms are particularly relevant to you.
Basically this form is used if a business has undergone a change that impacts its capital structure.
Capital structure is the amount of debt or equity used to operate your business. Often a business will decide it needs more debt or equity in order to invest in assets for the business. When this happens the business needs to file a 1099-CAP.
This form is also used when a business is acquired. In this case, the shareholders need to report gains from this acquisition by filing a 1099-CAP.
If you have a business bank account, then 1099-INT is probably something you should know about. As its name suggests The 1099-INT: Interest Income form is used to report interest to the IRS because this counts as income. If you have a business account, and this account earns more than $10 in any given tax year, you will have to to file a 1099-INT.
For a small business owner a 1099-R: Internal Revenue Service form might be used if your business has paid an individual for any of the following reasons;
- Profit-sharing or retirement plans
- Any individual retirement account (IRA)
- Insurance contracts
- Survivor income benefit plans
- Permanent and total disability payments under life insurance contracts
- Charitable gift annuities
The point of this form is to let the IRS know how much a person is earning in order to tax them appropriately. For example, if you have an employee who retires and you pay them retirement or pension, it is your responsibility to fill a 1099-R to let the IRS know they have received that payment.
You might need to file a 1099-SA if your small business provides any of the following healthcare plans to your employees;
- Health savings account (HSA)
- Archer Medical Savings Account (Archer MSA)
- Medicare Advantage Medical Savings Account (MA MSA).
If your employee has used funds from these medical accounts the IRS will need to know about it. As a business owner, you can also deduct funds that you contributed to these accounts in your tax return.