Tax News

Which IRS Forms Do You Need?

Forms you need to know about if you are an Independent Contractors, Small Business Owner, Or Consultant.

Filing tax returns can be a daunting process for most people. When small businesses, independent contractors, consultants, and the companies that hire these non-employees reach tax filing time, the process involved can be even more complex. The first step involved with correctly filing taxes for freelancers, independent contractors, and businesses is to know which IRS forms they must use. 

Understanding which forms are needed can help businesses that hire independent contractors, freelancers, and consultants during a tax year to maintain compliance with the applicable laws and regulations. For independent contractors and small businesses, knowing the required forms can help with tax planning so that they are not faced with an unmanageable tax bill when they file their returns. Below are some of the most common types of IRS forms that businesses, freelancers, independent contractors, and consultants should know. 

1099 Forms

While employees receive W-2 forms to report the taxes paid and income earned through their employment during the tax year, independent contractors and consultants are not considered employees. This means the companies for which they perform work do not withhold Social Security or Medicare taxes from their checks. 

To report the money paid to independent contractors, consultants, and freelancers, companies must use 1099 forms. These are information forms that are designed for companies to use to report income that is paid to non-employees for the work they have performed. 

Businesses use 1099 forms to report non-employment income paid to independent contractors and freelancers. 1099s are also issued for other purposes, including to report dividends earned from stock holdings, awards, prizes, real estate sales, and others. There are a large variety of different types of 1099 forms that are used to report earnings, but the most relevant types of 1099s for companies include the 1099-NEC. Before 2020, businesses reported non-employee compensation on Form 1099-MISC. 

However, starting in 2020, the IRS is requiring businesses to report certain types of non-employee compensation on Form 1099-NEC. This form must be filed for any individual who was paid $600 or more during a tax year by a company. A business that pays an independent contractor, consultant, or freelancer less than $600 during the tax year is not required to prepare and file a Form 1099-NEC. However, the contractor or freelancer must report the income he or she earned even if it is less than $600 and not reported on a Form 1099. 

When an independent contractor, consultant, or freelancer receives a Form 1099, it must be used to complete the income tax return and should be filed together with the return.

Understanding Estimated Taxes

Since federal income taxes, state income taxes, and Social Security and Medicare taxes are not withheld from the money paid to independent contractors or freelancers, they are required to remit these taxes when they file their returns. Depending on their total earnings from their work performed during the year, they might need to remit estimated taxes to the IRS and the state every quarter. Each state has its own laws about whether taxpayers must send estimated taxes, but the IRS requires taxpayers to do so when the taxes they will owe are expected to exceed a certain amount. 

The requirement for paying estimated taxes each quarter to the IRS makes it important for freelancers and independent contractors to save an appropriate percentage of their monthly earnings in an account designated strictly for taxes. While estimated taxes only need to be paid each quarter, setting aside a portion of earnings each month to prepare for the quarterly payment is advisable. This helps to ensure that the freelancer or independent contractor will not be late in paying the estimated taxes he or she should pay. 

Form 941

Employers are legally required to withhold certain types of taxes from their employee’s paychecks, including the following:

  • Federal income tax
  • State income tax (if applicable)
  • Social Security tax
  • Medicare tax

These taxes must be remitted to the IRS and the state taxing authority each quarter and reported on Form 941. Businesses do not use Form 941 for the work performed by independent contractors, consultants, or freelancers since they do not withhold these taxes from their checks. While independent contractors and freelancers must remit estimated taxes each quarter to the IRS, businesses that have employees must also prepare quarterly 941 Forms and submit them together with the taxes owed to the government. 

If a business fails to withhold the appropriate payroll taxes and remit them, it can face substantial legal liability. Money withheld from employees’ paychecks for income taxes, Social Security taxes, and Medicare taxes does not belong to the business. Instead, these taxes should be held in trust when they are collected and remitted to the government on time. Businesses that fail to withhold or submit payroll taxes can face criminal liability.

Contact us for Help With Tax-Related Issues

The basic IRS forms required for independent contractors, consultants, freelancers, and small businesses are important to understand. Understanding these forms and how to use and file them can help companies maintain compliance with all applicable laws and regulations. Using the wrong forms or failing to use the forms correctly can result in significant and potentially costly consequences, including significant tax liability and potential fines and penalties. 

Businesses and individuals who need help with tax-related issues and those who want to gain more control over their taxes can benefit from tax planning. To learn more, you can complete our tax assessment questionnaire. It can help you better understand your tax obligations so that you can plan appropriately. Contact us today for more information or to schedule a consultation.