Using Freelancers? Here’s How to Report Their Earnings to the IRS
There’s a major shift in how America works going on. More and more people, in all industries and of all skill levels, are working as independent contractors rather than in traditional full-time jobs. By 2027, more than 50% of the entire workforce will be freelancing.
That means, if your business isn’t already using freelancers, chances are it will be doing so in the near future. It also means you need to know how to report their income — something that the IRS (which is well aware of this trend) is increasingly concerned with.
The 1099 Form
This is the form you send to the independent contractor and the IRS every year to report their earnings. It’s essentially the equivalent of Form W-2 for employees.
There are several types of 1099 form. The one most commonly used by small businesses is Form 1099-Misc.
Who Qualifies as an Independent Contractor
Any individual or unincorporated business who is not directly in your employ, but rather hired on a contract basis to perform work, is an independent contractor. Unlike an employee, they are completely free to arrange their financial and work life as they see fit. Typical freelance roles include website developer, photographer, social media consultant and data processor.
Be aware that misclassifying an employee as an independent contractor will incur serious penalties from the IRS and state income tax authorities. To see what could happen, you need look no further than the huge lawsuit California won against Uber in 2015, claiming that Uber drivers were employees, not independent contractors.
The second qualification is that you paid them $600 or more during the tax year. That payment could be in the form of cash, rent, exchange of services, prizes and awards, and just about anything else that has a monetary value.
Who Doesn’t Need a 1099
Payments to C-corporations and S-corporations are not reported on Form 1099. You can tell if they’re incorporated by looking at the Form W-9 you had them fill out when you first hired them. (You did do that, right?)
Freelancers hired through a third-party service may not need a 1099 if they are considered employees of the service (similar to the Uber situation). For example, freelancers hired through Upwork are paid by Upwork, after you pay Upwork for their services. Make sure you understand the tax filing status of each service you use before you get into a contract.
How to File a 1099-Misc
1. Fill in the required information (which is on Form W-9 mentioned above):
• Contractor’s legal name
• Contractor’s address
• Contractor’s taxpayer identification number (or social security number if they are a sole proprietor)
- Check your bookkeeping records for the total amount you paid them during the tax year, and fill it in on the form.
- Submit Copy A to the IRS by January 31, 2019, either by mailing a physical copy or sending it electronically.
- Send Copy B to the independent contractor by February 15, 2019. You can mail a physical copy or send it electronically; but if you choose the latter, you must have the contractor’s consent and a verified method of transfer, such as an email address.
5A — for physical filing. Complete and submit Form 1096 (used for paperwork tracking) to the IRS by January 31, 2018. For electronic filing, this step is not necessary.
5B — for electronic filing. Obtain a Transmitter Control Code (TCC) by filling out Form 4419 and mailing or faxing it to the IRS at least 30 days before the deadline for submitting Form 1099-Misc.
State Income Reporting.
If the state where your business is based collects income tax, you may have to file 1099s with them as well. Check with the state’s tax authority for regulations and filing deadlines.
An Easier Way.
If this is all sounding like a lot of work, a great solution is to have an accounting service, such as Xendoo, do it for you. We’ll keep all of the necessary records and make sure the right forms get filed at the right time.