Taxes are a stressful and puzzling topic for everyone -- especially for independent contractors and freelancers. This is because self-employed workers are entirely responsible for tracking and paying their own taxes on income from multiple sources, in different sums, and on varying schedules. Having a handle on taxes for the self-employed is something that takes a lot of energy, comes with a learning curve, and requires constant maintenance.
So, it's not surprising that many independently-employed individuals are confused about what 1099 IRS forms even are, as well as:
In this article, you'll get clarifications to those tax questions -- as well as learn how the Bonsai Tax app can take over the bulk of tax management for you, sparing you from having to comprehend the complex (and constantly updating) IRS tax rules, rates, forms, payment schedules, and all the other cumbersome accounting upkeep.
First things first: why do you even need a 1099 form?
Self-employed taxpayers (known as 1099 non-employee workers) pay taxes somewhat differently from their salaried-employee taxpayer counterparts (known as W-2 employees). W-2 employees don't need to figure out their income or calculate their "pay-as-you-go" taxes: they just have to instruct their employers what percent of taxes to withhold from every paycheck (by filling out a W-4 form at the beginning of the tax year), and they are set.
Self-employed freelancers, on the other hand, are responsible for keeping track and accurately reporting their income to the IRS -- and they do this primarily by receiving a 1099 form from every client who contracts $600+ worth of labor from them. They are, likewise, required to issue a 1099 to other freelancers from whom they contracted $600+ worth of labor to benefit their businesses.
A form 1099 is an "information returns"-type of IRS form used to report non-employee payments made/received between freelancers and their clients.
Forms 1099 exist in several versions, depending on the nature of the non-employee compensation being reported.
In 2021, there are 20 types of form 1099. The most common among them are:
Form 1099-DIV is sent to taxpayers who are investors -- by banks, investment firms, and other financial institutions -- to report their dividend earnings.
Form 1099-S is used to report payments/proceeds from closing a sale or an exchange on real estate within the tax year.
1099-G is the form to report payments collected by the business owner from the federal, state, or local government. For example, local tax refunds and unemployment benefits are reported on this form.
Issued by banks and other payment processors, 1099-K exists to report payments for virtual sales transactions made possible by third-party platforms.
Form 1099-R is used to report getting a payout from a retirement plan, pension, or individual retirement account (IRA). Certain annuities and life insurance contracts may elicit an issuance of this form as well.
Form 1099-INT is issued to the taxpayer when they earn more than $10-worth of interest from banks as well as brokerage and other investment firms.
1099-NEC is the most frequently-used IRS form to report freelance income by non-incorporated independent contractors (this function was previously fulfilled by form 1099-MISC, but not anymore). With a few exceptions, 1099-NEC is filed to report payments of $600 and above from clients and employers.
Prior to 2020, form 1099-MISC was used for what 1099-NEC is used now -- as the primary means for most self-employed workers to report their non-employee income. 1099-NEC was introduced in 2020, and now, form 1099-MISC is used to report miscellaneous income that does not fit into other 1099 forms, such as money gained from prizes and awards, as well as rent, attorney fees, and royalties.
If you, as an independent contractor, paid another independent contractor $600+ for their services pertaining to running your business, you need to issue that contractor a 1099 form -- with a copy to be sent to both, the contractor and the IRS.
The deadline for filing a 1099-NEC form for the 2021 tax year is January 31st of the following year 2022 (read detailed instructions on how to file form 1099-NEC here).
The IRS can impose penalties for 1099 late filing, with fines ranging $50-270 per missing 1099 form, depending on how far past the deadline they are. The maximum late-filing penalty a business can incur per tax year is $556,500.
1099 forms can be printed out and mailed to the IRS but the easiest and fastest way to get the 1099s to the IRS is to file electronically via the "Filing Information Returns Electronically" (FIRE) system (this will require opening a free FIRE system online account).
If you are filling out 1099s for independent contractors you hired to help with your business, the following practices will keep you on top of your 1099 "game":
If you, as an independent contractor, sold your services to a client/employer for at least $600 for the tax year, that client/employer owes you a 1099 form.
If you did not receive Form 1099-NEC from every single client who paid you $600 or more for your work, it does not mean you can omit reporting the income received from those clients to the IRS. There's a penalty for not filing 1099 income.
U.S. taxpayers are taxed on all income (except for money that is gifted). It is, ultimately, their responsibility to make sure the IRS gets their tax payments in full and on-time -- as well as to pay all the IRS penalties, if the taxpayer fails to comply with their rules.
In the meanwhile, 1099s going missing is not a terribly rare occurrence. Sometimes they simply get lost in the mail; there are also times when they should have been issued but weren't for negligence or fraudulent intentions on behalf of the client/employer.
You cannot be held responsible with how others handle their bookkeeping or compliance with the IRS guidelines -- but you are responsible for covering all the legal bases on your own end. So, even if you did not receive the appropriate 1099 from some of the clients, it is up to you to make sure you report it on Schedule C (the "Profit or Loss from Business" portion of Form 1040) when you are filing your tax return.
Keep in mind: you only receive a 1099 form for earnings on at least $600 per tax year -- so, you may still have any number of under-$600 earnings you are required to report on Schedule C, even though you don't get a 1099 for those.
Not reporting all possible income means paying fewer taxes . The IRS obviously does not like that -- and throws any number of disincentives in the form of financial penalties at taxpayers who are caught not reporting or under-reporting their freelance income.
One way to get caught is this classic scenario. Your client filed a 1099 for you -- and a copy reached the IRS -- but your copy got lost in the mail. Not receiving a 1099, you assumed that this client simply didn't bother to report it on their end. So, you decided not to report the income you received from that client to the IRS either. Of course, the IRS did get the 1099 -- and now they know that something is "fishy" and will be contacting you for further clarification...
The IRS punishes the business owner for under-reported and mis-reported income (known as "Section 270A Of Income Tax Act") by imposing 50-200% penalty on the tax liability for the under-reported portion of the income, depending on whether it's ruled to have happened due to negligence or fraud.
Does all this tax talk makes you want to immediately curl up on the couch and go to sleep -- or, alternatively, gives you enough anxiety to keep you awake at night? You are certainly not alone in feeling put off by doing taxes.
The good news is that, besides hiring a professional accountant (which is recommended but costly), there are at least two things you can do on your own to anticipate and nip in the bud potential tax-filing problems having to do with 1099s.
One easy way to stay on top of 1099 accuracy is to ensure that clients who hire you -- as well as contractors hired by you -- exchange all the data necessary for issuing each other 1099s.
If you are contracting someone's freelance services to help with your business, ask for them to send you an updated W-9 form right away, so that when you are filing a 1099, you don't have to go fishing for information at the last minute.
Likewise, if you have been hired on a new gig, fill out a form W-9 on behalf of yourself/your business for every new client/employer you take on as soon as you start doing business with them, and without waiting for them to ask for it (this form is just for informational purposes -- therefore, no need to send a copy to the IRS).
A W-9 form provides your clients with all the information about you/your business they need to correctly fill out a 1099 form when the time comes to do so. It contains:
If your client/employer receives such a form at the offset of your contract, they will be more likely to remember and understand how/when to fill out and send a 1099 to you and the IRS. And if they don't, it is their choice that in no way casts a negative shadow on you! You provided them with all the information to issue a 1099, and as long as you report the income on your tax return anyway, you are in the clear with the IRS.
A major solution to consider for the long term is: using a digital accounting tool that is designed to take the strain and the confusion out of dealing with taxes -- specifically for freelancers.
Our tax program for freelancers can easily file taxes with missing 1099 forms, as long as you enroll the missing income data into it manually -- and will sort, track, organize, calculate, and fill out all the other tax "paperwork" and math you are responsible for as a self-employed freelancer.
Bonsai Tax is an accounting add-on to a whole Bonsai all-in-one product suite for freelancers, which means you can centralize all your business functions -- from customer relationship management (CRM) tools, to invoicing to multi-member project management, to proposal and other document writing, to additional accounting tasks -- all in one secure, cloud-based online account that's super user-friendly!
Considering that both, Bonsai all-in-one product suite and the Bonsai Tax accounting app are both available for a 14-day free trial, you can see what all the buzz is about for yourself.
The Bonsai Tax software is great not only because it takes care of all the complex, technical, unpleasant aspects of doing taxes: it also steers you toward developing better business bookkeeping habits. It is truly the best of both worlds! On the one hand, you are completely on top of your accounting and tax maintenance; on the other hand, all the painful aspects of taxes are automated, integrated, and done out of sight by a program designed for this very function, under a 100% accuracy guarantee.
Let Bonsai Tax handle your business accounting -- and save time, effort, and money in your pocket!
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?