The 1099 form is used to report payments made to independent contractors and functions as the equivalent of the W-2 form filled out for ordinary employees. The specific version used is Form 1099-NEC, although multiple alternative versions exist for reporting different kinds of payments.
Recent Changes to the 1099 Form
Until 2019, payments to independent contractors were reporting using Form 1099-MISC, intended for miscellaneous income. Since 2020, this form is only used for alternative compensation such as prizes and rewards. Most payments to independent contractors are now reported on Form 1099-NEC, specific to non-employee compensation.
Form 1099-NEC is only required when an employer has paid an independent contractor $600 or more in a calendar year. Remember, this is just one of many 1099 forms, which range from 1099-DIV (for reporting dividends and distributions) to 1099-C (for cancellation of debt).
How to Complete Form 1099
When filling out Form 1099-NEC, you’ll need the following information:
- Payer’s name, full address, phone number and taxpayer identification number
- Recipient’s name, full address and tax payer identification number
- Total account of compensation
- Any state or federal taxes withheld
In 2022, the deadline for submitting Form 1099-NEC will be January 31. Late or incorrect submissions risks fines from the IRS. For more detailed instructions, consult IRS guidance.
Who Counts as an Independent Contractor?
Determining the difference between employees and independent contractor is an important task for HR leaders. It impacts tax withholding, benefit offerings and if you get it wrong, you risk punishment from the IRS and Department of Labor. Independent contractors pay their own social security and Medicare taxes, income tax withholding, state and federal unemployment tax (FUTA), and workers compensation.
Employees don’t automatically become independents when they operate remotely, have increased flexibility or even if they sign a form agreeing to be an independent contractor.
The decision comes down to the analysis of three broad factors.
- Behavioral: Does the company control how and what the worker does?
- Financial: Are business aspects of a worker’s job controlled by the payer?
- Types of relationship: Is there a written contract or employee-type benefits?
Typically, independent contractors are paid per project, use their own equipment and have multiple clients. Contractors have control over the scope of projects, rather than simply following orders from an employer. If you’re unsure of the correct status for a specific workers, a business can submit Form SS-8 to the IRS, who will then make the determination themselves.
State Rules on Independent Contractors
Identifying the misclassification of workers isn’t just a federal issue. It’s also a priority for states, many of which take strict approaches to worker status. California among others uses an ABC test, where workers count as employees unless they meet all of the following criteria:
- Free from control and direction for the performance of the work
- Performing work outside the usual course of the hiring entity’s business
- Usually engaged in independently established trade, occupation or business that is the same as the work performed
Rules on dealing with independent contractors also differ between states. In some locations, businesses are required to report the hiring of new independent contractors. In Pennsylvania, employers must withhold state taxes from payments to non-resident independent contractors.
How Paycor Helps
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