What is the difference between a 1099 independent contractor and a W2 worker?

Workers must be classified either as a 1099 (independent contractor) or a W2 employee.  A 1099 worker generally has an independent business separate from the hiring company’s business.  There are many factors that can support a worker having an independent business – i.e. website, business license, EIN, etc.  A 1099 contractor is required to receive a form 1099 from the hiring company unless one of the exceptions applies (i.e. the contractor has a corporation).  However, an officer (i.e. CEO, Secretary, or Treasurer) of a corporation generally cannot be a 1099 contractor for his or her own company if they are performing.  Under federal and state laws, an officer of a corporation is generally a W2 employee.

Employees who work for a particular company are subject to the control of that company through employee handbooks and other company policies.  Employees may also be entitled to benefits (as well as minimum wage requirements) based on the State laws where the employee is working and the company must withhold income and other taxes and remit those taxes along with a payroll return to that State.  Employees generally receive a W2 from each employer who reports their gross wages and tax withholding to the federal and state tax agencies.

There are many different rules and standards to determine whether a worker is an employee or independent contractor based on federal or state laws and based on the purposes.  For instance, the standard used by your workers’ compensation insurance company may apply one set of rules under your state’s workers compensation insurance law while your state’s payroll tax agency (i.e. California EDD) may apply a different set of rules and standards.  However, IRS applies a different standard (i.e. the 20-factor test) versus the US Department of Labor’s standards.  Additionally, each state has its own rules – California recently enacted a new law known as AB5 (or the ABC test) that has 3 elements (not factors) to determine if a worker is an employee or a 1099 contractor.  Not all states have enacted the same ABC test.  Some states follow a common-law test.

How do I prepare a form 1099-MISC?

A 1099 form is a form published by IRS that all companies paying an independent contractor must file every year.  There is a $600 per worker threshold to require filing this form.  If you pay a 1099 independent contractor $600 or more in a single year, you are required to file this form.  There are several exceptions, such as when you pay a corporation or if you pay the worker or company with a credit card (because the recipient will receive a form 1099-K from their credit card processing company).  For certain payees, there is a lower threshold to file a 1099 – i.e. royalty payments or payments from brokers have a $10 threshold.

Before preparing the 1099 form, run a report in your accounting software to first identify the 1099 workers and then to summarize all payments to that contractor.  If the total payments exceed the threshold and there is no exception (i.e. the payee was not a corporation, you did not pay with a credit card, etc.) then you will need to file a 1099 with IRS.

Other rules and requirements exist.  Please consult with your accountant or an attorney if you have further questions.  The information in these FAQs is not intended to be legal advice and is only provided for information purposes.

What is the deadline to file a 1099-MISC with IRS?

You must provide a 1099-MISC to the recipient (payee) by February 1, 2021.  The deadline to file your 1099-MISC is March 1, 2021, if you file by paper, and March 31, 2021, if you file electronically.  If you are filing 250 or more information returns of any one type, you must file electronically.  The 250 or more requirement is subject to change and the threshold may be reduced to a lower amount.  Please refer to IRS instructions on information returns for further clarification.

Failure to file your returns electronically may result in IRS assessing penalties for each return not filed electronically.

Where do I mail the 1099-MISC and 1096 forms?

If you are mailing your hardcopy originals to IRS, include form 1096 (which summarizes all the 1099-MISC forms you provided to recipients) and include all 1099-MISC forms.

To ID a mailing address depending on where your principal business or legal residence is located see  https://www.irs.gov/pub/irs-pdf/i1099gi.pdf).  The information below should be verified with IRS’ website before mailing your tax forms and is subject to change.  Based on IRS 2021 General Instructions for Certain Information Returns, IRS indicates the “Austin Submission Processing Center address has changed.”

What is a 1096 form?

Form 1096 is an Annual Summary and Transmittal of U.S. Information Returns and is used to transmit the following forms: Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G.  Essentially, it’s a cover sheet that summarizes the total quantity of your forms you are filing with IRS as well as the total dollar amount of all forms being filed.

Why should I file a 1099-MISC form?

Filing a 1099-MISC reports income you paid to a worker. If you are required to file a 1099-MISC, but fail to timely file these information returns, IRS can assess penalties for each 1099 you fail to file.  Additionally, IRS can disallow any expenses you paid where you were required to file a 1099-MISC (i.e. hiring a contractor to build a website, repair your office, or provide accounting services for your business).

What information is required to file a 1099-MISC?

IRS instructions require “All Form 1099 filers must have an EIN.”  Thus, if you are a sole proprietor and have not obtained an EIN, you will need to go to the IRS website to apply for an EIN, which should be fairly quick and usually can be done online.  If you have not previously filed a Form 1099 or other return, you must obtain an EIN and include it on each Form 1099 that you file.

When preparing your 1099-MISC forms, you will need the following information:

Your company’s information:

• Your company’s legal name (whether a business entity or fictitious business name (a/k/a Doing Business As).
• Your company’s Employer Identification Number (EIN)
• Your company’s business address

Recipient’s information:

• The recipient’s legal name (whether an individual or business)
• The recipient’s taxpayer identification number (either an EIN or Social Security Number)
• Recipient’s valid address
• The total amount you are paying the recipient ensuring you properly identify the purpose for the payment, which will dictate what box you report the income.

Caution: when you use Form 1099-MISC to report payments to a worker, you will need to first confirm the worker is a valid contractor who meets both federal and state laws that define the requirements for classifying workers as contractors versus employees.

Additionally, you should attempt to verify the recipient’s taxpayer identification number (EIN or SSN) is valid.  Otherwise, IRS may reject your 1099 and require you to refile the 1099.

When you order a Verify1099.com report, you will receive verification of each EIN or SSN and a business background report for each 1099 recipient that you order a report.  The information will help you determine whether the recipient has a legitimate business.

If I do not file a 1099-MISC, what are the consequences?

If you are required to file a 1099-MISC, but fail to timely file these information returns, IRS can assess penalties on each 1099 you fail to file.  Additionally, IRS may open an audit and disallow any expense you pay to a recipient who was required to receive a 1099 and that you were supposed to file with IRS.  Alternatively, IRS may assess a backup withholding tax of 24% of the gross payments to each 1099 contractor you fail to file a 1099 for.

Which workers must receive a 1099-MISC?

Form 1099-MISC must be filed with IRS, and a copy provided to the independent contractor, for payments of $600 or more paid to any contractor who is not a corporation.  Other exceptions may exist.  Please refer to IRS’ website, IRS 1099 instructions, or consult with your CPA or tax attorney.

What is a W-9 and do I have to provide this when someone pays my company?

Use Form W-9 to request the taxpayer identification number (TIN) of a U.S. person (including a resident alien) and to request certain certifications and claims for exemptions.

An individual or entity (Form W-9 requester) who is required to file an information return with the IRS must obtain your correct taxpayer identification number (TIN) which may be your social security number (SSN), individual taxpayer identification number (ITIN), adoption taxpayer identification number (ATIN), or employer identification number (EIN), to report on an information return the amount paid to you, or another amount reportable on an information return. Examples of information returns include, but are not limited to, the following:

• Form 1099-INT (interest earned or paid)
• Form 1099-DIV (dividends, including those from stocks or mutual funds)
• Form 1099-MISC (various types of income, prizes, awards, or gross proceeds)
• Form 1099-B (stock or mutual fund sales and certain other transactions by brokers)
• Form 1099-S (proceeds from real estate transactions)
• Form 1099-K (merchant card and third party network transactions)
• Form 1098 (home mortgage interest), 1098-E (student loan interest), 1098-T (tuition)
• Form 1099-C (canceled debt)
• Form 1099-A (acquisition or abandonment of secured property)

Use Form W-9 only if you are a U.S. person (including a resident alien), to provide your correct TIN.  If you do not return Form W-9 to the requester with a TIN, you might be subject to backup withholding. 

If I receive a 1099-MISC, what should I do?

When you receive a 1099-MISC from people who have paid you, verify the total amount reported and match this amount to your own accounting and/or business records to confirm this amount is correct.  If the amount is incorrect, your income tax return could get flagged for an audit because IRS matches the amount reported on the 1099 filed by the payer with the amount you report on your income tax return.  The taxpayer-identification numbers for the payer (the company who paid for your services) and you (as the independent contractor who received the payment(s)) are reported on Form 1099-MISC.  IRS matches the data from the 1099 to the recipient’s income tax return and frequently issues audit letters to verify income and determine if an error in reporting has occurred.

Please consult with your accountant or an attorney if you have further questions.  The information in these FAQs is not intended to be legal advice and is only provided for information purposes.  This information is not intended to create, and receipt or viewing does not constitute an attorney-client relationship.  got1099.com and its affiliates are not a law firm but are a business reporting company.