Since I get a lot of questions about 1099’s and W2’s, I thought it would be helpful to do an in-depth article breaking down everything a small business owner needs to know about them!
WHAT’S THE DIFFERENCE BETWEEN A 1099 AND A W2?
Simply put, 1099’s are used for contractors and W2’s are used for employee’s. While 1099’s do not have taxes withheld, W2’s do. Other than that though, these forms play essentially the same role as each other – both are used to report the income you/your business has earned to the IRS.
WHO NEEDS TO FILE?
As a business owner it is your responsibility to file a 1099 for each of the non-employees that you paid more than $600 total to last year. (This only applies to services rendered, not product purchases). Think along the lines of payments you’ve made for rent, commission, or a service. Generally these will be contractors or freelancers that you hired – a Virtual Assistant, Coach, Graphic Designer, Web Developer, Accountant, Photographer, etc.
1099s can be confusing because there are some very unique caveats in determining if you need to file one. For example, you do not need to file a 1099 if…:
You paid via a payment processor, like Paypal or a credit card. This is because payment processors will send their recipients their own version of a 1099, called a 1099-K. (Keep in mind that apps like Venmo and Zelle are not considered payment processors as they do not charge the processing/merchant fees).
The business you paid is a corporation. If they are an S-Corp or if their business has “inc” at the end, you’re off the hook! If you’re not sure if they are considered a corporation, you can verify by double checking their W9
HOW DO I FILE?
Step 1: Once you know who you need to file a 1099 for, you’ll want to request a W9 from each of those vendors. I know, * eyeroll*, another form?! Yes, but I promise, this step is pretty easy actually! The W9 form you request will tell you their name, business address, and social security/EIN. It’ll be exactly the info you need to then file a 1099!
Step 2: Figure out how much you paid each contractor that year for services rendered.
Step 3: Complete a 1099 form for each contractor on your list. For this step I recommend using an online filing system because it not only will help you ensure you file them correctly, but it’s super cost effective too. Some of my favorites to use are:
1099online | Efile4biz | Tax1099
Step 4: 1099’s need to be sent to the IRS, your state government, and the individual/business owner.
WHEN ARE THEY DUE?
The 2021 due date for 1099’s to be distributed to vendors and the IRS was on February 1. Assuming you’re reading this to prepare for next year though, the due date to keep in mind is February 15, 2022.
If you are wanting to make the process of gathering and filing 1099’s even easier on yourself for future years, I have just the thing! I’ve created a 1099 Tracker… and I’m giving you a copy of it. My gift to you!
I try to be very intentional about helping my clients get set up for success so that they can make proactive choices for their businesses, instead of coming from a place of continually being reactive. I want to help you get set up for success too so that you are able to feel more prepared for filing your 1099’s in the upcoming years.
You can use this handy tracking sheet to manage all of your contractor payments and their information. This way you’ll have everything easily stored in one place and you won’t have to try to hunt them each down individually. Taking a few extra minutes to keep track of this information throughout the year here and there, will save you from a lot of time and stress in the long run!
I recommend keeping a hard or digital copy of it in a folder alongside copies of any W9’s and 1099’s you accumulate during 2021.
You can access this free resource here:
If you need help or have additional questions, Patton Accounting & Tax, PLLC is more than happy to assist you! Let’s hop on a call!