Whether your business has employees or works exclusively with vendors and independent contractors, you’ll need to meet tax reporting requirements to operate successfully. This information can help you do just that…
Before our Sidekick Accounting experts get into the tax filing details, let’s answer some basic questions about forms and worker status.
What is and why do I need a 1099 Form?
Form 1099-MISC is tax form that businesses use to report types of non-employee compensation. That could be anything from royalties and rent to prize money and payment for professional services. As a business owner, you submit Form 1099 to your payees or independent contractors as well as to the IRS. Businesses that pay more than $600 for services rendered by non-employees need to file a 1099 form.
W-2 employees versus contractors: What’s the difference?
From a tax reporting perspective there is a difference between your employees and the independent contractors you hire. Your employees are workers you hire under an employment agreement, whether they’re full-time or part-time. You as the business owner are responsible for providing your employees with supplies, offering benefits, and paying taxes on their wages. Independent contractors are another story, as these individuals work for themselves. Rather than an employment agreement, you’d issue a contract that spells out expectations and payment terms.
In addition, tax percentage requirements also differ with your employees versus independent contractors. Business owners must pay a percentage of their employees’ taxes—6.2% for Social Security tax, 1.45% for Medicare, and whatever state and federal unemployment taxes apply. But independent contractors are responsible for paying their own taxes, which is 15.3% (2.9% for Medicare and 12.4% for Social Security).
W-2 Filing Must-Haves for Business Owners
Keep this information in mind as you prepare to file Form W-2 for your employees:
Due dates. January 31 is the date you need to remember for filing. You’re submitting all the tax info from the previous year on that January 31 date in the new year (i.e., tax info for 2021 is due by January 31, 2021). You can file W-2 info electronically online or via a hard copy.
Employee essentials. You’ll need each employee’s name, address, and social security number (SSN)—all info you collected from them when they filled out a W-4 once they were hired.
Income info. You need to know the total amount of income that each of your employees earned throughout the year, as well as how much you withheld in social security and Medicare taxes. You’ll also want to know what you paid for each employee in terms of things like union dues, health savings accounts, compensation plans, or retirement plans.
Know your number. You’ll need to include your employer identification number ( a 9-digit number issued by the IRS) and state ID number (assigned by your state) on all W-2 filings.
Don’t Make These 1099 Mistakes
Filing the wrong 1099. There are actually several different types of 1099s, so make sure you’re filing the correct one for your contractors, as well as for you as a business owner. For example, Form 1099-R is for distributions from pensions, annuities, retirement, profits-sharing, insurance, etc. Form 1099-S is used for when you received real estate sales proceeds. Form 1099-MISC is the one we covered here that you’d use when filing the compensation you paid out to an independent contractor.
Keeping Inadequate records. You need to stay organized and keep track of all business receipts so you can prove any expenses. Improper records can lead to reporting mistakes that could mean additional tax payments and penalty fees.
Late and nonpayment penalties. Make sure you’re aware of the 1099 filing deadlines so you can avoid paying penalties for filing late or not filing, which can cost you up to 5% a month for every month it’s late.
A Form 1099 Learning Opportunity for You…
Looking for more guidance on when and how to issue 1099s for your small business? Sidekick Accounting owner Megan Schwan will be sharing her knowledge in an online course in January 2021. Contact us and we’ll add you to the email list so you can register when details are available.