independent contractor

To 1099 or not to 1099?

/ Meghan Birmingham Vangeli / Leave a comment

If you are an independent contractor (aka “a freelancer”), chances are good that you have been the recipient of a Form 1099-NEC (or several) somewhere along the way. However, did you know that you may be required to file them too? Read on…

Why, you ask, would I need to file such a form?  Well, if you paid any person(s) $600 or more to provide services in the course of your business1 during 2023, you are required to prepare and file Form(s) 1099-NEC2 for them by January 31, 2024.

What do you mean “person”?  Well, a “person” in this circumstance is an individual, sole proprietor, partnership, or LLC that is NOT organized as a corporation.  So, if you paid Frank the Painter, Inc. (an S-Corporation) $700 to paint your rental house, you are off the hook and do not have to send a 1099 to his corporation.  But if you hired Gina Smith, an unincorporated sole proprietor, to repair your rental house plumbing for $600 or engaged Dewey, Cheatham & Howe, LP for $1,000 of legal consulting3 for your self-employed business, you will need to send Gina and/or DC&H a Form 1099-NEC.

What if I paid a guy I found on Craigslist $750 to buy a water heater for my rental?  Do I need to send that guy a 1099-NEC too?  Nope, 1099-NECs are only for service or labor payments, not purchases of goods or equipment. However, if you are issuing a Form 1099 to a contractor who supplied or installed materials and equipment incidental to the services they were providing, then you would include the entire amount of the payment on the Form 1099.

Okay, well what do I need to do to prepare these 1099-NECs?  The first thing is you need to get a Form W-9 from anybody you paid $600 or more during 2023.  (Really, it is better to get the W-9 from anyone your business hires before any work commences or money changes hands…but better late than never.)  This will give you the person’s legal name, current address, taxpayer identification number/social security number, and a confirmation of their federal tax classification (i.e., individual, partnership, corporation, etc.).  Then, if you plan to prepare and file the Forms 1099-NEC yourself, I would take a peek at the IRS Form 1099-NEC filing instructions for some guidance. You can either purchase the special paper 1099 and 1096 forms (no, you can’t download them from the IRS website), fill them out, and mail them in (only permitted if you have 10 or fewer forms to file), or you can use an online service to file them electronically (now required if you have more than 10 Forms 1099-NEC to file).4  Or you can always hire an accountant to help you… <ahem>

So what terrible thing is going to happen if I don’t file Forms 1099-NEC? To be blunt, you will pay penalties and wind up filing them anyway. The IRS hates this, and they have started hating it even more in recent years. If you are supposed to file Forms 1099 and you fail to do so, the IRS deems those Forms 1099 to be late. They then charge late penalties of anything from $60 to $630 per form depending on how late it is. That’s per Form 1099. So if you have 10 Forms 1099-NEC to file, you could be on the hook for up to $6,300 in penalties…and you’ll still have to file the forms. The penalties are severe, so it is really best to get these forms filed timely (that is, by January 31st).

Take a look at your tax records to determine if your business paid anybody $600 or more during 2023. If you did, gather the info and get those Forms 1099-NEC done as soon as possible!

  1. “Business” could mean a trade or business activity (like freelance musician or tax preparer) or a rental activity (like a landlord or an AirBnB host). ↩︎
  2. Yes, Form 1099-NEC. Not Form 1099-MISC. Go back and read my prior post on this. We haven’t been using Form 1099-MISC for “Nonemployee Compensation” since tax year 2019. If you’ve been using Form 1099-MISC for the past three years, well, you’re doing it wrong. ↩︎
  3. There are some special rules for legal fees. Consult your tax advisor if you may have this issue. ↩︎
  4. The IRS has recently unveiled its new online efiling service for information returns like Forms 1099. It’s called the “Information Returns Intake System” or IRIS. So cute…so floral…so, evidently, dysfunctional. Surprisingly (or not), every practitioner I have heard from has had problems with the system locking them out. So, for this year, I would investigate a different filing method (either paper, if eligible, or a commercial efiling service) for your Form 1099 filing needs. ↩︎

I provide this for information or entertainment purposes. It should not be construed as tax advice. Please consult your tax advisor to address your specific tax filing needs.

That’s so gross!

/ Meghan Birmingham Vangeli / Leave a comment

Why do you keep using the word “gross” all the time…?

You’ve probably heard the term “gross receipts” and wondered what that means. No, it’s not cash register tape that’s…like…sticky. (I hate ‘sticky’…) “Gross receipts” is the total amount of compensation you received before any expenses are deducted. Accounting types (like me!) will also refer to this concept as “revenue” or sometimes “gross income”.

This “gross” concept can pop up in different places on your tax return. We might have “gross wages”, which we find on your Forms W-2. Or there’s “gross rents” which is everything you collected from your renters if you have rental properties. However, the place where I see the most confusion with “gross receipts” is with self-employment income.

Gross receipts from self-employment income generally include every dime you receive in the course of doing business. It may be reported to you on Form 1099-NEC. This form is provided to you if you earned $600 or more from any one payer during the tax year. Guess who else this form is provided to…that’s right – the IRS! If you fail to report gross income from Form 1099-NEC on your tax return (likely on Schedule C), you will get a friendly note from the Federal government that includes a bill for the unpaid tax along with interest and penalties to keep it company. That’s generally not something we want to encourage, so we have to make sure to report all that revenue.

But what happens if you don’t receive a Form 1099-NEC? If you earn less than $600 from somebody, that income is not taxable, right? Yeah, no. The reporting threshold for Form 1099 has nothing to do with whether or not the income is taxable. The $200 you earned at that one-off wedding gig? Taxable. The student that pays you $50 a week in cash for private lessons? Taxable. The Zelle or Venmo payments you receive for providing a service to a client? Taxable. Essentially any money you receive in the course of your freelance business is taxable and should be included with your Schedule C gross receipts.1

But, what if you don’t get 1099s from your students and didn’t get them from several of the gigs you played. How are you supposed to figure this out? Well, gentle taxpayer, you must acquaint yourself with the concept of record keeping. You are running a business, so you have to do some work behind the scenes to keep track of this business. You don’t have to get QuickBooks or take accounting classes (been there/done that). But you do need to figure out a system so you can accurately report your income.

So where should you start? Well, there are a couple things you can do to get organized. The first thing I would recommend is to open a checking account for your self-employed business income only. Deposit all your self-employment gross receipts into that account (and nothing else — keep any W-2 wages or other types of income in a separate account). That way, at the end of the year, you can run a report of the business account’s activity and add up all the deposits. You can also use this account to pay business expenses when possible. Whatever is leftover can be transferred into your personal account.

A dedicated bank account is something the IRS loves. They also love a dedicated credit card. If you are a credit card person, designate one as your “business” card and use it only for business expenses. That will make tax time a little easier too.

Finally, to pull it all together, you can look into a budgeting or accounting program like You Need a Budget (“YNAB”) or Xero. This is kinda for extra credit, but it can give you some insight into how much you’ve earned year-to-date (helpful for estimated taxes) and can give you reports at tax time. And, not surprisingly, it can help you set your budget.

  1. Gross rant: If you give me a stack of 1099-NECs and say that’s 100% of your freelance gross income…but I know you teach and I’m pretty sure I played a gig with you that isn’t on a 1099…I will not believe you and will ask again about your total gross receipts. I’ve got liability too…especially if I believe you’re intentionally underreporting your income. That’s also known as “fraud”. The IRS preparer penalties for me if you (we) are caught are not worth the tax prep fee you pay. I will not think twice about telling you to find another CPA if I know, or strongly suspect, that you are being dishonest about this. /rant ↩︎

This information is for entertainment or educational purposes only. Please consult your tax advisor for advice on your specific tax situation.

A Quick Word on Mileage

/ Meghan Birmingham Vangeli / Leave a comment

Mileage is a tricky one, especially since the IRS can’t seem to make up its mind about it. Here is a basic guide to what mileage is deductible (for Federal tax purposes…state income tax codes may vary) and a few other tweaks…

  1. Miles you drive to/from your home to/from your regular place of business are not deductible. These are “commuting” miles.
  2. Miles you drive to/from your home to/from your W-2 job or from W-2 job to W-2 job are not deductible. (Blame Paul Ryan.)
  3. Miles you drive from place of business to place of business* for freelance/1099 work ARE deductible. These are “business” miles. (*A “place of business” might be your home office.)
  4. Miles you drive to/from your home to drop off charitable contributions or provide charitable services are deductible (subject to itemized deduction rules).
  5. Miles you drive to/from medical care are deductible (subject to itemized deduction rules).

NEW FOR 2022: Business miles (see #3 above) are subject to two different standard mileage rates during 2022. Business miles driven January 1, 2022 through June 30, 2022 are 58.5 cents per mile; business miles driven July 1, 2022 through December 31, 2022 are 62.5 cents per mile.

Finally, the IRS has elevated mileage to one of the items they are examining more closely. If a return is selected for audit, the revenue agent will need to see documentation of the mileage deduction claimed. This can be from a mileage log, a mileage app, or some other reasonable method of mileage computation. “Same as last year” is not a reasonable method, so let’s make sure we are diligent with our recordkeeping. Personally, to track mileage, I keep a spreadsheet of business miles based on the appointments in my calendar. The spreadsheet has columns for date, origin, destination, purpose, round trip miles, tolls, and parking. I update it periodically.

And now I return to my regularly scheduled returns…

This information is for entertainment or educational purposes only. Please consult your tax advisor for advice on your specific tax situation.

Let’s Talk 1099s

/ Meghan Birmingham Vangeli / Leave a comment

If you use independent contractors (service providers who are not your employees) in your business, you may be required to file Forms 1099-MISC and the related Form 1096.  This is a form that you don’t want to miss because the IRS penalties for late filing or failure to file are a serious bummer.

Here is a link to the Form 1099 instructions, but these are the general rules for most small business owners and sole proprietors:

  • The Form 1099-MISC/Form 1096 filing deadline is January 31, 2018.  This is both to distribute forms to nonemployee compensation recipients AND to file with the IRS.
  • Prepare a Form 1099-MISC for any nonemployee compensation recipient paid $600 or more during 2017.
  • Nonemployee compensation paid to independent contractors is reported in Box 7 of Form 1099-MISC.
  • Form 1099-MISCs generally are not required to be issued to service providers that are organized as corporations (both Subchapter C and S).*
  • For Form 1099-MISC filing using paper forms, the original forms suitable for filing with the IRS must be purchased.**  They can be ordered online or purchased at an office supply store.  (Pro tip: spring for the 1099 envelopes too.  Makes life easier and looks a lot more professional than plain envelopes.)
  • If you pay independent contractors, be sure to have them fill out a Form W-9 so you have their tax identification number and updated address information.  Keep this Form W-9 in your files so it is available should the IRS ever want to see it.
  • If you are a sole proprietor, I strongly recommend that you obtain an employer identification number.  You can apply for one online here.  This keeps your social security number from being distributed with every Form 1099-MISC.

It’s not too early to start thinking about this.  January is right around the corner!

 

*Attorney fees over $600 must be reported on Form 1099-MISC even if the legal provider is organized as a C or S Corporation.  Use Box 7.

**Unfortunately, the sample Forms 1099-MISC/Form 1096 on the IRS.gov website are not suitable for filing, and can trigger a penalty if submitted to the IRS.