How to Drop 1099s from your Tax Season To-Do List
Ah, December - bells are ringing, lights are twinkling, and mailboxes are filling with tax paperwork. If you’re a small business, entrepreneur or agency who depends on freelance work, you know how stressful it can be to track down the proper tax documentation for all of your remote talent. And, whether it’s your first year freelancing, or you’ve been in the game for a while, tax season can push even the most hardened freelancers over the edge. If you feel your stress levels rising, don’t worry! We’ll be rolling out a comprehensive suite of tax resources on our blog to help you cope.
If you’re a seasoned contractor, you know that each and every client must submit a 1099-MISC documenting work with their contractors during tax season, assuming the work meets a certain threshold (usually $600 over the course of the year). The 1099-MISC will be replaced by the 1099-NEC in 2020, but its purpose remains the same. 1099s are the freelancer version of W-2s, reporting to the IRS the income associated with the work performed for the client that year. Where the two forms differ is in their tax withholding reporting. While clients typically withhold income taxes throughout the year for their full-time W-2 employees, freelancers are responsible for reporting and paying their own income taxes at the end of each quarter.
You may be thinking, “No biggie - what’s a little form in the grand scheme of things? Plus, don’t accountants handle that kind of thing?” The truth of it is,1099s are a huge hassle, especially for clients who work with multiple freelancers. 1099 forms must be sent out to every independent contractor by January 31st, then filed with the IRS by February 28th (in 2021). Often this process involves confirming that mailing addresses are correct and tracking down a W-9 or two. No fun. So if you’re a business who employs independent contractors - especially one without a dedicated accounting department to handle 1099 distribution and submission - this article is for you.
And honestly, tax form season is not all that much more “fun” for contractors. Established contractors who receive a slew of 1099s from their clients at the end of the year also know how cumbersome and sometimes awkward this process can be. If you don’t receive a form, do you ask for it? Do you just let it slide? What if the figure doesn’t add up to what your records indicate you’ve earned? (Because make no mistake - even if you don’t receive a 1099 form, or if the form isn’t correct, every bit of your income must be reported!)
The best way to slash 1099’s from your list of to-dos, no matter if you're a contractor or a client, is to outsource. You could pay a tax professional to help you out, but there’s another option to consider that will save time, money, and a little of your sanity during tax season (and throughout the rest of the year, frankly).
As you plan for 2021 and beyond, clients should consider paying their freelance talent through a third party settlement organization. Don’t let the official IRS term scare you away - there are some pretty recognizable companies that fall under this umbrella, like PayPal, Upwork, and Ditto. Paying your talent through one of these third party settlement organizations changes the filing threshold and shifts the responsibility for filing over to them. Third party settlement organizations are required to issue a 1099-K form for every individual whose annual business transactions meet the filing thresholds (and it’s up to them to do all of the necessary tracking to ensure they fulfill this requirement). So when you use these kinds of organizations to pay freelancers, you’re off the hook for 1099 forms. Why? Internal Revenue Code Section 6050W states that when a client isn’t paying talent directly via payroll, direct deposit, or other owned measures, you don’t need to submit a 1099-MISC for that worker.
What does all of this mean if you’re a contractor? It’s pretty simple. When you work with a third party settlement organization geared specifically toward providing this service for clients and contractors, you’ll be asked to submit a W-9 form one time, and that’s it - the platform will take it from there. When tax season comes around, the platform handles the filing of 1099-K forms, taking into consideration all of the clients you’ve worked with during the year. All tax-related communications and forms come from the platform, rather than from your clients, and should be consolidated to include all of the work you’ve done for every client via the platform.
It’s important to note that in order to truly benefit from using a third party settlement organization, it’s best to run all business transactions through the service. If, for example, a client initially paid a freelancer via a third-party settlement organization but then later decided to pay the freelancer directly, the platform can only be responsible for the transactions that were run through the service. The client in this example would still have to handle the 1099 filing for any payments made directly. That’s why the end of the year is a great time to be thinking about what NEXT tax season might look like!
Some of these third party settlement organizations, like Upwork, also function as marketplaces. If you need to find talent (or find work), you may want to give them a try! If you already have the resources you need but just want to be able to pay your contractors more simply and avoid the tax forms, a platform like Ditto is a better option. Upwork and other similar marketplace fees - even for the “bring your own talent” configuration - are 10x what you’ll pay elsewhere, and they typically don’t just charge you one time for making the match - they keep charging the same high percentage on every subsequent project. A platform like Ditto is instead purpose-built for contractors and clients working together directly, and has benefits that go beyond tax-time, including escrow payments and dynamic scope of work portals. If you’re thinking about process improvements in 2021, it may be worth checking out.
The bottom line: get through this season of tax forms, making sure to dot your i’s and cross your t’s and hit all of those important deadlines… and then reward yourself by making it your last.