Freelancers! Don’t miss this key deadline for W-2s and 1099s
You are likely familiar with the W-2 tax form (a.k.a. the IRS “Wage and Tax Statement”). An employer must send a copy of this form to their employee and one to the IRS to report wages paid and the total tax withheld from those wages.
If you have been freelancing for a while, you should also be familiar with another tax form, the 1099-MISC, which is essential for reporting the income that you have been paid by any client over $600.
While these forms may seem pretty straightforward, if you are new to employing other individuals or making payments to contractors or vendors through your own freelance business, things get a little bit more complicated. The following tips on W-2s and 1099s will help you stay in compliance and avoid the fines that the IRS can levy on business owners who fail.
1099s and W-2s are due January 31, 2019.
If you employ any staff you must send a copy of Copy A of form W-2 to the Social Security Administration by January 31. You must also furnish Copy B and any other applicable copies of the W-2 to your employee (s) by this date.
For 1099s, Copy A must be sent to the IRS by January 31 if you are reporting non-employee payments. However, there are some variations in the due date as follows:
- February 28 if filing by paper when you’re NOT reporting non-employee compensation.
- March 31 if filing electronically when you’re NOT reporting non-employee compensation.
W-2s and 1099s are considered information returns, but filing is compulsory.
The Social Security Administration (SSA) and the IRS use W-2s and 1099s, respectively, to help ensure that payments for Social Security benefits and taxes are accurately made by taxpayers. Even if you have just one employee, you must provide them with a W-2 by the January 31 due date and file it with the SSA. In addition, if you made a payment to a contractor or vendor during the calendar year as a small business or self-employed freelancer you need to file a 1099 with the IRS.
An important note about 1099 forms: do NOT file Copy A of information returns downloaded from the IRS website because it cannot be scanned and you may be charged a fine by the IRS for using it. Instead, order the official printed version from the IRS.gov website. They are free but they do take 10 business days to arrive.
Fines for not filing W-2s and 1099s can be steep
The IRS has become much more aggressive in fining individuals and businesses. Current fines and penalties for businesses with $5 million or less in gross receipts are:
- Not more than 30 days late: $50 per return with a maximum penalty of $187,500.
- 31 Days late to August 1, 2019: $100 per return with a maximum penalty of $536,000.
- After August 1, but not intentionally disregarded: $260 per return with a maximum penalty of $1,072,500.
- Intentionally disregarded: $530 per return with no limit on the maximum penalty.
Additional payments that must be reported on a 1099
If during the course of your freelance business you made any of the following types of payments in the amount of $600 or more, you will need to file a 1099 (or one of the alternate versions of the form) with the IRS and send the appropriate copy to the contractor or vendor to whom you made the payment:
- Independent contractors or other individuals who are not employees of your business
- Prizes and awards and certain other
- Backup withholding or federal income tax withheld
- To physicians, physicians’ corporation or other supplier of health and medical services
- Gross proceeds paid to an attorney
- Interest on a business debt to someone (excluding interest on an obligation issued by an individual) (1099-INT)
- Dividends or other distributions to a company shareholder (Form 1099-DIV)
- Distribution from a retirement or profit plan or from an IRA or insurance contract (Form 1099-R)
- Payments to merchants or other entities in settlement of reportable payment transactions, that is, any payment card or third party network transaction (Form 1099-K)
Additional forms of income that must be reported on a Form 1099
On the flip side, if as a freelancer or self-employed business owner you received the following types of payments, you may need to file the appropriate 1099 return.
- The sale or exchange of real estate (Form 1099-S).
- You are a broker and you sold a covered security belonging to your customer (Form 1099-B).
- You released someone from paying a debt secured by property or someone abandoned property that was subject to the debt (1099-A) or otherwise forgave their debt to you (1099-C).
- You made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment (1099-MISC).
There are also several notable instances where you are not required to file a Form 1099, including:
- You are not engaged in a trade or business.
- You are engaged in a trade or business and the payment was made to another business that is incorporated, but was not for medical or legal services.
- The sum of all payments made to the person or unincorporated business is less than $600 in one tax year.
Whether clients send 1099s or not, freelancers must still claim the income
If you have been paid more than $600 in the same tax year by a specific client, then they should send you a 1099. However, if they fail to do so, remember that you must still claim the income on your tax return based on your own accounting records.
The preparation and filing of W-2s and 1099s is one of the first signs that tax season is here for freelance business owners. Make sure that you have all of your proverbial ducks in a row on these information returns to avoid fines and penalties. Once you take care of these forms, keep the momentum going by preparing the remaining your documentation for your individual and business returns.
Jonathan Medows is a New York City-based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He offers a free consultation to members of Freelancer’s Union and a monthly email newsletter covering tax, accounting and business issues to freelancers on his website, www.cpaforfreelancers.com — which also features a new blog, how-to articles, and a comprehensive freelance tax guide.
Jonathan is happy to provide an initial consultation to freelancers. To qualify for a free consultation you must be a member of the Freelancers Union and mention this article upon contacting him. Please note that this offer is not available March 1 through April 18 and covers a general conversation about tax responsibilities of freelancers and their potential deductions. These meetings do not include review of self-prepared documents, review of self-prepared tax returns, or the review of the work of other preparers. The free meeting does not include the preparation or review of quantitative calculations of any sort. He is happy to provide such services but would need to charge an hourly rate for his time.