The Guide to 1099’s for Online Business Owners

One of the most confusing parts of business taxes that I keep running into with clients are the 1099-MISC/NEC forms. I’ve met so many online entrepreneurs who had no idea they even needed to do anything with a 1099-MISC/NEC form, let alone knowing what they are.

So let’s break down everything you need to know about 1099-NEC for your online business into plain English that you can understand. 

As of 2020 tax filings, the 1099-MISC has been renamed to the 1099-NEC (non-employee compensation). Similar form, just a different name. This form is specifically for contractors who are not employees of your company.

As a business owner, you are required to report non-employee compensation to the IRS each year.

What is a 1099-NEC? 

This is a tax form that the company who RECEIVED money from another company/person will issue. If more than $600 was exchanged in a calendar year, a 1099 NEC should be issued. 

This form informs government bodies (federal, state and local) of money that the contractor has received as nonemployee compensation. Or if you are the one issuing them, how much money you paid to someone else during the course of the year. 

If you paid a person or company more than $600 in one calendar year, you should be issuing a 1099-NEC to that person or company. This person or company must also be located in the USA, so if you work with someone who is outside the USA in your business, you will not be issuing a 1099-MISC/NEC to them. 

The reason behind this form is to let the IRS know that you hired an independent contractor for services in your business and this is how much they have been paid. Independent contractors do not receive a W-2 that had federal income tax withheld, so it’s essentially up to the contractor and the business who hired the contractor to report to the IRS how much money was exchanged.

What do I need to complete a 1099-NEC? 

To complete a 1099-MISC/NEC, you need to have a W-9 filled out by the person or company who you paid the money to. This W-9 will list all of their pertinent information: name, address, business type, and social security number or EIN. The W-9 must also be signed by your independent contractors. An unsigned copy is not a valid copy.

NOTE: No matter what type of business legal structure you have (sole proprietor, LLC, partnership, S Corporation, C Corporation), get an EIN from the IRS. It is free. It saves you from having to hand out your social security number to everyone. If you have to pay to get an EIN, then you are not getting it from the IRS. It typically takes about a month to get your EIN in the mail after you apply or you get it instantly if you accept electronic delivery. 

If you work with someone who does not operate in the USA, you must have them fill out a W8-BEN form. Then you will just keep this form on file with all of your other tax and financial documents. This form just indicates that you did your due diligence in proving that the company or person you paid did not live in the USA. 

The other thing you need when you are completing a 1099-NEC is the total amount of money you paid the person or company you are issuing the form to. If your bookkeeping is done, then you will have all of this information readily available at your fingertips.

These forms are quite easy and simple to complete when you have all of the right information in front of you. I personally like to use Yearli to complete my tax forms and send them off. There are several other places like Yearli that allow you to easily e-file both the copy to your contractors and the IRS copy. Yearli will also make it easy for you, in that each following year you continue to use their services, they will remember the information you plugged in from the prior year.

Who receives 1099-NECs? 

Any company or person who operates in the USA and has a sole proprietor, LLC or partnership. 

If the company or person has an S Corporation or C Corporation, they would not be issued a 1099-NEC. Limited liability corporations are issued a 1099, unless they elect to S Corporations.

If you paid the company or person solely through PayPal, Stripe, or Venmo, you will also not need to issue a 1099-NEC. Those companies will issue the form for you. But if you paid by cash payments, check or ACH, then you must issue these forms.

These forms are typically issued to those people or companies who perform services for your business. Accountants, lawyers, virtual assistants, OBMs, social media managers, Pinterest managers, community managers, etc. fall into this category. 

Keep in mind that you are issuing a 1099-NEC to those contractors and gig workers that provided a service to your business. For business purposes, all of these people you hire for services are considered self-employed individuals, so you must report nonemployee compensation. 1099-NEC are issued for services performed, not consumer products, digital products and the like.

If you were to get audited and it was found that you were not issuing 1099-NECs to your independent contractors, you would be fined for each one you didn’t issue for those who performed services for your business.

Do you Contractors meet the Independent Contractor test?

There are many businesses who hire contractors who should actually be employees. But business owners think they can save money by having contractors instead of employees on payroll.

Spoiler alert: if you get caught failing the independent contractor test, you will owe some pretty hefty fines plus back payroll taxes.

Someone passes the independent contractor test if they meet the following points:

  • are not in charge of any of your other contractors or employees
  • can develop their own schedule and do not have to work certain hours
  • provide all of their own equipment and supplies to complete their job

If you tell your contractors when they have to work or they have to oversee your other contractors or employees, they fail the the contractor test and should be on payroll, instead of receiving nonemployee compensation payments.

When do I need to send 1099-NECs? 

1099-NECs need to be postmarked to the recipient by January 31 (or the first business after January 31 if it falls on a holiday or weekend). This is the due date, but sometimes these forms are not always issued by the due date simply because of poor recordkeeping and lack of knowledge about the right tax forms that need to be issued.

Then the cover sheet, transcript and copies of the 1099-NECs must be sent to the IRS by February 28 (or the first business day after February 28 if it falls on a holiday or weekend). 

This extra time in between allows the recipient to receive, review and confirm that the information is correct before you send all of the information to the IRS. Plus you can file electronically to save time and the ability to forget that you need to make it to the post office to send some mail.

What about receiving 1099-NECs?

What if you receive a 1099-NEC in your business? Check out this post detailing what to do if you receive multiple forms

You would just use these forms to report your income on your tax return when you file it. 

A 1099-NEC form helps you properly report your self employment income to the IRS. When you do your bookkeeping in your business, all of your income is lumped into one big number. For each 1099-NEC that you receive in your business, you would add that form to your tax return and in turn, reduce the total amount of income from your bookkeeping forms by the same amount on your form.

For example, if you had $120,875 in income in your business and you received a 1099-NEC from 3 of your clients (one for $5000, one for $2680, and one for $12575), you would add each of those forms to your tax return, and then on the line that says your total income not reported by tax forms, you would put $100,620.

Your expenses you would just detail like normal on the expense portion of your tax return.

Are you in the know about keeping your business in compliance with the tax laws? 

As a business owner, it is your sole responsibility to make sure you are in compliance with the tax laws that apply to your business. This means, you either need to do the proper research to make sure you are covered in all of the ways possible, or work with someone who can help keep you covered and in the know. 

You already have a lot of hats that you wear as a business owner, so hiring a professional who has the education and knowledge about the tax laws is going to be most beneficial to you. 

These professionals will also help you know if you should be issuing 1099-MISC/NECs to people and companies who you purchase from. 

Whether you know or not about sending 1099-MISC/NECs in your business, you most likely have at least 1 or 2 that you should be sending. So make sure you are in compliance with the tax laws. 

If you still need assistance with your 1099’s, I have created a course – Mastering 1099’s that goes much more in depth than this post about 1099’s for your business. 

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