New IRS Funding Leads to 1099 Changes
As we approach the new tax season, we want to highlight important changes to 1099 reporting and remind you of your responsibilities as a taxpayer. Read below for more information on how to stay compliant and avoid penalties.
For Business Owners: Issuing 1099s is Required
As a business owner, you are required to issue 1099s for any nonemployee compensation of $600 or more paid during the calendar year. This includes payments to contractors, freelancers, and certain vendors for their services.
What Qualifies Someone to be a Contractor?
The IRS has 20 tests or guidelines for differentiating contractors from employees. These tests range include relationship permanence, facility investments, work schedule and more. For more about the difference between an employee and contractor, read our blog post here.
What Happens If You Don’t Issue a 1099?
Failing to issue 1099s when required can result in penalties ranging from $50 to $630 per form.
Collecting W-9s is Essential
To ensure proper 1099 filing, collect a valid W-9 from every contractor before issuing payment. A valid W-9 includes the business name, mailing address, Taxpayer Identification Number (EIN or SSN), and signature.
Without a valid W-9, you could be subject to 24% backup withholding and required to remit it to the IRS. Business owners should also have a signed contract for the work performed by a contractor.
Don’t panic. If you don’t currently have valid W-9s for your contractors, now is the time to collect them.
Click here to grab your copy of a blank W-9!
What You Need to Know About Backup Withholding
Backup withholding is required when you fail to collect a valid Taxpayer Identification Number (TIN) from a contractor. If you don’t have a completed W-9 on file for a contractor, you may be required to withhold 24% of the payment and remit it to the IRS.
Who’s at Risk?
Any business owner who makes payments to independent contractors or freelancers without first collecting a valid W-9 form.
When Does Backup Withholding Apply?
If the contractor fails to provide a TIN, provides an incorrect TIN, or the IRS notifies you that the TIN provided is invalid.
For Individuals: Reporting 1099 Income is Required
If you receive a 1099 form, you are responsible for reporting that income on your federal income tax return and paying the applicable taxes.
What Does a 1099 Report?
A 1099 form reports income received outside of regular employment, such as freelance work, consulting, or side gigs. Even if you don’t receive a 1099, you are still required to report all income earned.
How to Prepare for Tax Season:
Keep detailed records of all payments received.
Verify the accuracy of any 1099s you receive, and notify the payer of any discrepancies.
Set aside funds for self-employment or income taxes to avoid surprises at tax time.
How We Can Help
At Kelsey Glass CPA PLLC, we can help you set up efficient systems to track payments and collect information from contractors using QuickBooks Online.
Need assistance? Contact us today at (931) 477-8417 to get started.