The year 2020 was a rollercoaster of changes for everyone. Along with these changes came new laws and legislations, including the 1099-NEC due date and other important aspects of the form.
Before 2020 hit, if your company had contract work or was into freelancing, you would either receive or issue a 1099-MISC. Now, a new form was made to report income from independent contractors.
Form 1099-NEC is the new bad boy in town. Also referred to as non-employee compensation, this form caters to everyone who is self-employed. In this article, we'll go over when you need to file the 1099-NEC.
Form 1099-NEC is a tax form specifically made to report non-employee compensation. This compensation is made for people who are not on the payroll and only receive their compensation upon finishing a project.
Here, we are talking about gig workers and independent contractors. It also includes self-employed people who previously used to file Form 1099-MISC to report their income.
This form cannot be downloaded online. You'd either have to file it through the Filing Information Forms Electronically (FIRE) system, or you'd have to order through the website of the IRS.
What's the due date for 1099s? The 1099-NEC due date is at the end of every tax year, on January 31. In this case, you must have the tax papers filed to the IRS by January 31, 2022.
In the event that this day does not fall on a business day, when 1099s are due moves to the next business day. For instance, if January 31 falls on a bank holiday, then you may make that payment on February 1.
This applies to Copy B of the form as well. For you to make the due date, you will be required to file it by January 31, at the end of the tax year.
For those who are filing non-employee compensation, form 1099-NEC reports the following:
If these conditions are met, the client may calculate self-employment taxes and file for non-employee compensation.
1099-MISC and 1099-NEC are highly connected. Before the 1099-NEC came around, form 1099-MISC was the one used for non-employee compensation. Now, form 1099-NEC is used for that instead.
This does not mean that form 1099-MISC is no longer used. Contractor payments are indeed reported with 1099-NEC, but there are other reports made with 1099-MISC as well.
The main use of form 1099-MISC now is to make reports for miscellaneous income. For example, if you have to make payments to an attorney or rent, then you will have to use 1099-MISC form.
Previously, while form 1099-MISC was used, the information would be reported in box 7 of the form. Form 1099-MISC and 1099-NEC are similar - but the latter has its own separate boxes now (form 1099 for rent, attorney payments, or other payment types).
There are certain circumstances in which you may need to send out or file form 1099-NEC, but mostly, it depends on the circumstances of the work.
As a starting point, if you have a business and you hired a contractor, you might have to turn in form 1099-NEC. If their pay is more than $600 within the year, it is your job as the payer to file these forms.
That being said, as the payer, you will have to submit two copies: one to the IRS, and one to the contractor you needed for your trade or business.
If you are the one receiving the second copy from a variety of business owners that you work with, then you don't have to file form 1099-NEC.
With that in mind, if you are self-employed, you should still ask for a copy of the form from the businesses you work for. You may need the paperwork to add it to your own records.
Bear in mind that if the contractors are marked as S or C corporations, then you won't need form 1099-NEC. In that case, Form W-9 is the one to go for.
If the recipients are employees, you won't need to submit the new form to the IRS. Instead, the employee will have to submit Form W-2 themselves. These forms are necessary to report tips, wages, and other compensations received throughout the tax year. Since, the Internal Revenue Service receives the tax information, the IRS will catch a missing a 1099 if you don't file.
If you are the one making the payment, you need to obtain form W-9. With this, you need the following information:
Technically, you can still file your taxes without 1099 forms.
The payer is responsible for filing Form 1099-NEC, and they will find that all the information necessary to fill the form is already there.
If you are collaborating with a payroll service to pay the contractors, they will be the ones to file and mail form 1099-NEC. Your only input there would be filing form W-9 upfront.
The total paid amount should be found on the bookkeeping records. See how much every independent contractor was paid by the end of the tax year, and use that information to file 1099-NEC. Don't forget about your tax deductions. We recommend you use an app track receipts for taxes to do it for you.
All types of payments, including the cash money for fish or payments for attorneys, have to be submitted in Box 1 of the form.
With that settled, two copies of the form need to be submitted: one to the IRS and the other to the contractor. Those are referred to as copy A and copy B.
The first copy of the 1099-NEC form, namely Copy A, needs to be submitted to the IRS by the end of the tax year. This can be done either by traditional mail or by e-filing.
You may ask for a physical version of form 1099-NEC from the IRS website. If you wish to file through a paper copy, bear in mind that its cover sheet needs to be the 1096 form. Once you gathered and completed them, all that is left is for you to have them delivered to the IRS.
On the other hand, if you wish to do it electronically, you'll have to use the FIRE System.
Remember that you'll need a service provider or software that can create the document in its proper format. PDF or scanned copies will not be taken into consideration.
If you're using FIRE, you'll also require a Transmitter Control Code (TCC). You may do so by completing Form 4419 and faxing or mailing the IRS.
This should be done at least one month before your form 1099-NEC tax deadline. Then, you will be contacted by the IRS, which will provide you with the TCC. With this done, you may create your FIRE account.
While Copy A needs to go to the IRS, Copy B should be given to the independent contractor. With that in mind, you will need their consent first.
You need to obtain consent in the same way that you would send the copy. For example, if you are emailing the form, then you'll have to email when asking for consent as well. If you cannot get consent that way, then you'll need to use traditional mail.
For the request for consent to be IRS-compliant, you'll need to include the following:
Once consent has been received, you are free to send them an electronic version of Copy B.
Filing for 1099-NEC forms can still be made after the due date, but remember that there will be a penalty for that. The 1099 late filing penalty that you will owe will depend on how late you are with the payment. The penalties break down as follows:
There are serious penalties if you don't file a 1099. Late filing of required 1099s can result in fines ranging from $50 to $280 every 1099, with a maximum penalty of $1,130,500 per year for your small business.
The final amount will be set depending on when you file the right information. If you know for a fact that you will be unable to pay by January 31, then you may submit Form 8809 to request a 30-day 1099 extension.
Keep in mind that even under these circumstances, you'll still need to supply these forms 1099 to your independent contractors by January 31. If you need to make any changes to a submitted form, you'll need to file a 1099 amendment.
The new 2020 form 1099-NEC is an updated form of the 1099-MISC. By the end of the tax year 2020, people no longer had to use the old form to report contract income. Now, everything could easily be done with the 1099-NEC form. We hope our article has helped business owners understand how it works.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?