If you have ever been employed, you are likely familiar with the W-2 tax form (a.k.a. the IRS “Wage and Tax Statement”). An employer must send a copy of this form to their employee and one to the IRS to report wages paid and the total tax withheld from those wages.
If you have been freelancing for a while, you should also be familiar with another tax form, the 1099-MISC, which is essential for reporting the income that you have been paid by any client over $600.
While these forms may seem pretty straightforward, if you are new to employing other individuals or making payments to contractors or vendors through your own freelance business, things get a little bit more complicated. The following tips on W-2s and 1099s will help you stay in compliance and avoid the fines that the IRS can levy on business owners who fail
- 1099s and W-2s are due January 31, 2019. If you employ any staff you must send a copy of Copy A of form W-2 to the Social Security Administration by January 31. You must also furnish Copy B and any other applicable copies of the W-2 to your employee (s) by this date.For 1099s, Copy A must be sent to the IRS by January 31 if you are reporting non-employee payments. However, there are some variations in the due date as follows:
- February 28 if filing by paper when you’re NOT reporting non-employee compensation; or
- March 31 if filing electronically when you’re NOT reporting non-employee compensation.
- Although W-2s and 1099s are considered information returns, this doesn’t mean that filing them is optional. The Social Security Administration (SSA) and the IRS use W-2s and 1099s, respectively, to help ensure that payments for Social Security benefits and taxes are accurately made by taxpayers. This is why if you have even just one employee, you must provide them with a W-2 by the January 31 due date and file it with the SSA. In addition, if you made a payment to a contractor or vendor during the calendar year as a small business or self-employed freelancer you need to file a 1099 with the IRS.
An important note about 1099 forms: do not file Copy A of information returns downloaded from the IRS website because it cannot be scanned and you may be charged a fine by the IRS for using it. Instead, order the official printed version from the IRS.gov website. They are free but they do take 10 business days to arrive.
- Fines for not filing W-2s and 1099s can be steep. Although the 1099 form is considered an information return, the IRS has become much more aggressive in fining individuals and businesses who do not file them. The current fines and penalties for businesses with $5 million or less in gross receipts are:
- Not more than 30 days late: $50 per return with a maximum penalty of $187,500
- 31 Days late to August 1, 2019: $100 per return with a maximum penalty of $536,000.
- After Aug. 1 but not intentionally disregarded: $260 per return with a maximum penalty of $1,072,500.
- Intentionally disregarded $530 per return with no limit on the maximum penalty.
- There are payments beyond those made to contractors which must be reported on Form 1099 or one of the alternate versions of the form. If, during the course of your freelance business, you made any of the following types of payments in the amount of $600 or more you will need to file a 1099 with the IRS and send the appropriate copy to the contractor or vendor to whom you made the payment:
- Independent contractors or other individuals who are not employees of your business
- Prizes and awards and certain other
- Backup withholding or federal income tax withheld
- To physicians, physicians’ corporation or other supplier of health and medical services
- Gross proceeds paid to an attorney
- Interest on a business debt to someone (excluding interest on an obligation issued by an individual) (1099-INT)
- Dividends or other distributions to a company shareholder (Form 1099-DIV)
- Distribution from a retirement or profit plan or from an IRA or insurance contract (Form 1099-R)
- Payments to merchants or other entities in settlement of reportable payment transactions, that is, any payment card or third party network transaction (Form 1099-K)
- There are also forms of income which must be reported on Form 1099 or one of the alternate versions of the form. On the flip side, if, as a freelancer or self-employed business owner, you received the following types of payments you may need to file the appropriate 1099 return.
- The sale or exchange of real estate (Form 1099-S)
- You are a broker and you sold a covered security belonging to your customer (Form 1099-B)
- You released someone from paying a debt secured by property or someone abandoned property that was subject to the debt (1099-A) or otherwise forgave their debt to you (1099-C)
- You made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment (1099-MISC)
There are also several notable instances where you are not required to file a 1099 including if you are not engaged in a trade or business; or you are engaged in a trade or business and:
- The payment was made to another business that is incorporated, but was not for medical or legal services or
- The sum of all payments made to the person or unincorporated business is less than $600 in one tax year.
- Freelancers who don’t receive 1099s from clients must still claim the income. If you have been paid more than $600 in the same tax year by a specific client, then they should be sending you a 1099-MISC Form. However, if they fail to do so, remember that you must still claim the income on your tax return based on your own accounting records.
The preparation and filing of W-2s and 1099s is one of the first signs that tax season is here for freelance business owners. Make sure that you have all of your proverbial ducks in a row on these information returns so that you don’t face fines or penalties. Once you take care of these forms keep the momentum going by getting the rest of your documentation ready for filing your individual and business returns.