Who is a contractor?
A contractor is a person working for you but is not an employee.
Anyone who works for or performs services for your business who is not an employee. Including but not limited to the following:
Accountants and Bookkeepers
Anyone that you hire to help you with your services/ goods that you do not supply materials, a computer, office space for them to work and you do not pay employment taxes on them.
There can be a very fine line between contractor and employee. If you are unsure if they are employees or a contractor look at IRS.gov or get professional help.
It is best to have your contractors fill out a w9 before they start working. Especially before they get paid. This way they know the expectations and there is no confusion. This also allows you to have it just in case they refuse to give it to you after you have already paid them. That is a common issue my new clients have so I would highly suggest avoiding the confusion. If you are not able to get a w9 from your contractors then you can’t send them a 1099 and therefore you are unable to deduct the payment from your bookkeeping and taxes. So, this is important!
Why am I required to send 1099?
When you pay someone over $600 the IRS requires you to send them 1099. If you can, pay them by credit card or PayPal they will not need 1099. This is a nice way to avoid the hassle of needing to send 1099 at the end of the year. If you pay them by Venmo, cash, check, direct bank transfer, etc keep in mind you will have to send them 1099 at the end of the year. Keep in mind this is not a complete list of payment options, if you paid your contractors another way, consult with your accountant, or better to be safe than sorry, send them 1099. PayPal and other third-party companies’ requirements have changed this year. The main reason for this change was to allow for people to exchange funds for personal reasons. When someone works for you, they are earning money and should be required to file taxes for that earned income. Your requirements to send 1099s to your contractors stay the same. If you paid someone over $600 outside of PayPay or a credit card, make sure you send them a 1099.
If you paid someone reimbursed someone for materials, supplies, tools and ect. That still be reported on their 1099. Then they can take those expenses as a write-off on their own Schedule C. It is important that you make sure you capture all the payments to your contractors and the expense the expenses that they incur while being your contractor on their tax return.
The IRS requires 1099s to be sent because as you know, they want their money! If 1099 is not sent the contractor could get away without having to pay taxes on money earned. If they or you are audited, you both could be in trouble. It is a big deal. Make sure you send the 1099s that are required.
If your independent contractors are an S Corporation or a C Corporation, they will not need a 1099 no matter the payment method. This is the same for you, if you are an S Corporation or a C Corporation you do not need to request 1099s for your business income. The reason corporations do not need to receive 1099s is that they are already tracked and watched more heavily than an LLC without an S Corporation. S Corporations and C Corporations are required to pay payroll and must pay payroll taxes. Not all LLCs are incorporated, you can be a Limited Liability Company and still be required to receive 1099. Make sure to consult with a legal professional or accountant if you are unsure if you or your independent contractor is incorporated.
Keep in mind, no matter the payment method or incorporation have them fill out a w9 for your records! It is important that you have one on file just in case of an audit. Trust me, better to be safe, than sorry!
What is an employee?
An employee is someone who has a set schedule, works in your office, or location, and or does not supply their equipment, supplies, etc. They must follow your rules and do what you want them to do when you want it done. They have deadlines that you set and they usually are required to work for you solely in a specific industry. A contractor does not have to follow a set schedule or deadlines and usually works doing the same work for others. Contractors must supply their materials, supplies, and equipment. They also usually have their own business and business insurance to do what work they are helping you with.
What do I do if I have been treating my employees as contractors?
Oops! Well, take a deep breath. This happens more often than you would think. It is best now to start them on the payroll. If it is mid-year, I would suggest trying to do backdated taxes, if possible. If it is the beginning of the year and your employees were treated as contractors last year, make them official employees for this year and send 1099s for last year. Just keep moving forward. It is better to start today than to wait. If you need help getting your contractors paid as employees through payroll reach out to an accountant or payroll specialist who can help you get it all set up correctly.
For free, you can download my PowerPoint that covers everything we talked about in this blog in an easy-to-follow format. It is best to keep sending a 1099 when in doubt.
What is next, I have contractors but do not know how to send 1099.
I have the perfect answer for you! I have created a mini course for those who need to send 1099s but do not know how to. This mini-course will show you how to do it within QuickBooks Online and an online program outside of QuickBooks Online. Both have a small fee to process each 1099 but it is worth it. The online program does not require a membership so you pay per 1099 that you need to send.
Send 1099s to your Contractors Mini Cour
Can I do my own bookkeeping including 1099s?
Yes, you can! I created an amazing bookkeeping coaching program to teach you how to do your own bookkeeping!
It has been helping mother entrepreneurs like yourself, learn how to do their bookkeeping for over 8 years. I have created a simple-to-follow workbook with videos, and an easy-to-use Excel sheet or Google Sheets to keep your business books.
I also go over the basics of QuickBooks Online if you would rather use an amazing program for your bookkeeping.
Bookkeeping’s basic steps are: Accept transactions in your accounting software, reconcile your accounts monthly, and review reports monthly. It is that easy! The first step is deciding when it best fits into your schedule. Learn today when it is best for you to do your bookkeeping!
The complete course includes the mini-course that covers the 1099s and so much more! Full Course available for purchase here: