Solopreneurs and independent contractors may have already received IRS Form 1099 from clients who were invoiced $600 or more in tax year 2020. As you may have heard, the forms have changed. The general rules concerning who must file the form remains the same, but there are now two versions —-the 1099–NEC and a recalibrated 1099–MISC. Solopreneurs and independent contractors must receive their appropriate Form 1099 no later than February 1, 2021. The 1099–NEC cannot be downloaded online but must be ordered from the IRS website. Businesses must file Form 1099-MISC with the IRS by March 1 (March 31 if filing electronically).
1099–NEC (non-employee compensation) will be filed by solopreneurs and independent contractors and that category also includes attorneys. Clients are required to send out this version of 1099 when:
- Payments of at least $600 were made during tax year 2020 to an individual (or company) who provided services to the client company but who is not formally employed by the client company.
- Payment was made for services rendered and not for products or merchandise.
- Payment was made to an individual, partnership, or other unincorporated entity. With the exception of attorneys or law firms, payments to either C or S corporations are not recorded on Form 1099–NEC or 1099–MISC.
Solopreneurs and independent contractors who file 1099–NEC will report their income on IRS Schedule C (Profit or Loss from Business), a supporting document of Form 1040. Your client should ask you to complete IRS Form W-9 if you bill, or expect to bill, $600 or more in the year.
Clients would typically mail to solopreneurs and independent contractors a hard copy of 1099-NEC (copy B), but the client may ask, or solopreneurs and contractors can request, that an electronic copy be sent instead. Email correspondence between client and worker, in which the solopreneur or contractor consents to receiving an electronic 1099–NEC from the client, is all that’s required to authorize the electronic format.
1099–MISC will be filed by recipients, including Limited Liability Companies (LLC), of $600 or more in rent payments (landlords), plus prize and award winners who receive $600 or more and recipients of royalties in excess of $10.
Other types of 1099–MISC income includes payments to an attorney or law firm for fees other than legal services, payment received from a legal settlement, fishing boat proceeds and non-qualified deferred compensation.
Solopreneurs, contractors and merchants who accept credit and debit card payments (maybe on Square, Stripe, or PayPal) will receive Form 1099–K from their payment processors if those payments amounted to $20,000 or more and 200 or more transactions took place during calendar year 2020.
The card transaction income reported on 1099–K confirms for both the business and the IRS that income reported on 1099–K and Schedule C aligns. However, the business may also receive checks or even cash, so Schedule C income may be greater than 1099–K income.
The 1099 is part of federal taxes, but 39 states also require it to be filed with annual taxes. States that do not require the 1099 to be filed at that time are: Alaska, Florida, Illinois, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington and Wyoming.
For more instructions on filling form 1099: https://www.irs.gov/instructions/i1099msc.