Ten ninety what?: Making Sense of the 1099-MISC
Sometimes freelancers need to reach across the web… …to other freelancers.
This will be Mountain Owl’s second year filing taxes. It’s pretty flippin’ exciting (Taxes? Exciting? Who knew!) because it means that Mountain Owl has enjoyed another blossoming year of [profitable] business.
Don’t get me wrong: writing doesn’t have a lot of overhead in the first place. Unlike a brick-and-mortar business or new product venture, writing is likely one of the least expensive professions to get into, if not the least expensive. I don’t have an office or warehouse to pay rent on, utilities to expense, raw materials to replenish, or even fancy equipment to maintain. And I don’t have to pay other people to help me produce my product…
…that is, unless I hire a freelancer.
Freelancers Hiring Freelancers
This past year was a little different for me. Not only did I unexpectedly score a more-or-less permanent position as a Content Manager for one of my original clients from 2013, but that position eventually required me to subcontract work to another freelancer who specialized in doing transcriptions from audio recordings.
I went from getting hired to hiring. Weird.
So, back to my original freelancing stomping grounds I went, this time writing up a job requisition and screening applicants for best fit, something I haven’t dipped into since my HR Rep days back in 2012. When I finally decided on which applicant to hire, I had to set up a payment account, get my bookkeeping squared away, create a new file for this person’s invoices and payment receipts, yadda, yadda, yadda.
And then those tax commercials started appearing on television sometime between Thanksgiving and Christmas. Initially I thought, “I’ve totally got this,” thinking that perhaps I’d kindly remind my clients who’d paid me more than $600 through the course of 2014 to send me a 1099-MISC, the form “used to report income to freelancers, independent contractors, and other self-employed individuals who, as their own employer, are generally responsible for paying the employer’s and employee’s portion of taxes”. (Source: MoneyCrashers.com)
Then I remembered: I had paid out money to a freelancer, too! And, suddenly, I was in a scramble to make sure I had all my tax ducks in a row. *Quack*
On the Cusp, Off the Hook
Luckily, the freelancer I’d hired didn’t get over $600 of Mountain Owl’s money, but that was only because I enlisted their services in late November and the invoices didn’t have a whole lot of time to accumulate. This year (2015) is likely to be a different story. I already have two invoices for her on the books and more are likely on the way if my clients keep recording interviews which need transcribing and posting. And, at the rate their business is growing, I’m expecting quite a number of them. (Yessssss!!!)
So, I’m off the hook for 2014. *Whew*
But, in preparation for tax season 2015, I’ve done a little research into the “giving” end of the famed 1099-MISC and wanted to share my findings, in case there are freelancers out there whom you’ve hired (or plan to hire, or want to hire) to do a job for your business. These are super basic, possibly obvious tips, but they’re still worth repeating for the sake of committing them to your business-minded memory.
That said, here are Mountain Owl’s
3 Preparation Tips for 1099-MISC
#1: The 1099 deadline is NOT tax deadline.
The average person adheres to the usual, procrastinative, “This isn’t due until April 15th” way of thinking. But don’t get sucked into thinking that 1099-MISCs are due out at the same time as your usual filing. By law, 1099-MISC forms should be received by the freelancer no later than January 31, which is barely more than a week away.
Freelancers use the 1099-MISCs they receive from clients in order to do their taxes and, if you’ve followed rules #2 and #3 below already, you won’t need a whole lot of time to put together your forms and you can easily get those babies mailed out before January is through. That gives your freelancers lots of room to breathe, not to mention it gets it off your chest and out of the way so you can get down to business as usual.
#2: Minimize stress by maximizing accounting software.
I’ve said it before and I’ll say it again: GoDaddy Online Bookkeeping has saved my life. Okay, maybe not my life, but definitely my sanity.
Keep on top of expenses instead of trying to shuffle together 365 days’ worth of receipts, invoices, and other paperwork at the start of the fresh year. I set a monthly calendar reminder for myself to go through my manila folder labeled “Receipts not yet input” (yeah, I keep things pretty basic) and, well, input them. I’m fairly old school, so I haven’t yet acquired a knack for using my Blackberry smart phone to input transactions on the fly (besides that, there’s no GoDaddy Bookkeeping app made for Blackberry OS anyway). But, if you have an iPhone or Android and are into that techie, instant-gratification sort of thing, by all means, go for it. Me? I find something relaxing about slowing down and handling and filing real paper and doing a wee bit ‘o brainless data input.
Staying on top of menial tasks—like organizing receipts and keeping paperwork filed away instead of stacked in a pile that grows more intimidating with each new transaction— is a good idea whether or not you have any 1099-MISCs to send. Doing so will alleviate any pressure to rush as you approach tax deadline, you’ll be more accurate with the data input, you’ll be less likely to miss something, and, well, it’s just great business common sense.
And owls love common sense.
#3: Confirm addresses before mailing.
There’s nothing like doing the diligent thing and sending out all the required paperwork on time or ahead of time only to have it returned to you with the dreaded “no such person at this address” and a heavy-handed slash scrawled across the front of the envelope in frustrated scribble.
Before filling out and sending out the 1099-MISC, confirm with the freelancer that you have their correct mailing address and Tax ID Number (aka: TIN, sometimes the same as your Social Security Number) on file. Doing this ahead of time will save a lot of headache, that extra postage, and avoid the aggravation of having to rewrite, and resend, a crispy new form.
It may only take a few minutes to write out a new form and slap a stamp on the envelope, but those few minutes can impact productivity big time: workplace studies have shown that it takes the average employee nearly 25 minutes to get refocused on a task after a disruption. That means in each hour, if you have only one disruption, you’re only getting about 35 minutes of work in. In an 8-hour work day, one disruption per hour can add up to 200 minutes (or about 3 hours 20 minutes) of time spent just getting refocused. So, let’s see:
8 – 3h 20m = 4h 40m
Minus two 10-minute breaks (if your state requires it) = 4h 20m
Minus the 25 min each break to refocus = 3h 30m of productive “work” time.
And that’s not counting bathroom breaks, lunch hour, phone calls, intermittent “water cooler” chitchat, and the end-of-shift, I’m-ready-to-get-out-of-here jitters that start about an hour before the work day is through (c’mon, don’t lie; everyone gets them).
It’s no wonder we can clock out feeling like we haven’t gotten much done!
And, I know I said three tips, but let’s just count this last one as a bonus…
#4: Good fences make good customers.
Putting up good, strong “fences”, or boundaries, are necessary in order to maintain healthy relationships, whether that means in business or your personal life. For business transactions—especially those you may have with friends or family—that means sticking to business.
Okay, so this tip may not be specific to 1099s, but it is something of importance when it comes to tax time. That’s because…
No matter how close you are, no matter how long you’ve been working together or have known each other, no matter how many drinks you grab after hours, maintain solid expectations on both sides. And, in business, solid expectations are set through diligent and accurate documentation.
The term “documentation” may sound intimidating, but it really just means keeping good records. In HR, that meant maintaining accurate employee records (e.g. emergency contact information, promotion dates) as well as taking notes during one-on-one discussions (e.g. annual performance reviews or those ugly conflict resolutions meetings).
One way Mountain Owl does this is by maintaining up-to-date contracts with each and every client for each and every project. That means writing out what the client expects of me (work) and what I expect from them (payment), down to the nitty gritty, so there’s no confusion. Though it may seem common sense, you’d be surprised how many freelancers don’t bother protecting themselves with a client-signed contract; too many freelancers put too much stock in verbal contracts that, while technically legal, are hard to prove if ever things go sour.
Not only does omitting a written contract put the business relationship in danger, it puts the freelancer directly in danger of…
Financial losses if payment isn’t received on time, in the correct amount, or at all;
Legal claims if ever there’s a need to go to court (hopefully not);
Possibly marring their reputation as a freelancer who doesn’t take their craft seriously; and thereby
Losing the confidence of current and future clients.
For taxes, maintaining accurate documentation means not shunting the responsibility of sending out those 1099s in a timely and professional fashion. Just because you’re friends doesn’t mean you should take advantage of the relationship and put their needs at the end of your list, thinking you’ll get more forgiveness from them. Just because you see them regularly in the grocery store or at church on Wednesdays doesn’t mean you shouldn’t be professional and mail the 1099 to them, like any other business would, in a tasteful stamped and addressed envelope. Just because you’ve been working together for a long time doesn’t mean their needs settle behind those of newer contractors.
1099s: An Opportunity to Do Good
Excuse my warm fuzzies, but I like to think there are brighter sides to everything we do in life, from buying organic produce to tipping the barista to the duller tasks, like patronizing certain retailers or choosing to work standing versus sitting.
Where to Find (Trustworthy) Freelancers
Hiring freelancers is a great way to get a good product at a competitive price without the hassle and expense of formally hiring an employee to do the work you need. Online resources like Angie’s List and <<babysitter www>>—websites that provide freelancer and contractor background checks and customer reviews for free or at low cost—make it easier than ever to find great, professional, trustworthy contractors without worrying about getting ripped off by a freelance conman (or woman).
Some freelancer herding companies (e.g. Elance, Guru, or Odesk are the most popular) also provide escrow services. As the employer, if you don’t get the product you want (according to your pre-arranged contract, that is), you can file a complaint and might not have to pay. Just remember that that escrow protection works in both directions: you’ll likely have to make an initial deposit or link a PayPal or bank account to ensure the freelancer gets paid, so employers can’ just take the product and run.
Here’s to building good fences and #payingitforward!