A sole proprietorship is one of the easiest types of businesses to create if you’re pursuing a passion on your own and want to make money from it. It’s an unincorporated business, but you can always change things in the future if you wish.
While you don’t work under any bosses, there are still tax forms to deal with, and things can get complicated. For example, there are the IRS 1099 Forms, which many entrepreneurs have to use.
But does a sole proprietor need a 1099? If so, then which ones? Read on to find out.
What’s a 1099 Form?
A 1099 form is a tax document used to report income that hasn’t come from an employer. This means that wages and salaries are excluded from 1099s. Essentially, it’s a key way for the IRS to track earnings made outside of traditional employment.
In general, businesses, organizations, and other entities use it to document payments made throughout the year. It ensures that all income (including non-traditional ones) is reported to the IRS for tax purposes.
The following are examples of people who use 1099 forms:
- Independent contractors/freelancers
- Landlords
- Investors
- Gig workers
You may have come across the question, “What is a 1099-NEC?” The fact is, there are many other 1099 forms, so here’s a quick bullet list of what the common ones are and what they’re for:
- 1099-NEC: payments to independent contractors or freelancers
- 1099-MISC: miscellaneous income (i.e. rent, royalties, or prizes)
- 1099-K: income processed through third-party platforms like PayPal (above certain thresholds)
- 1099-INT: interest income from banks or financial institutions
- 1099-DIV: dividends or distributions from investments
- 1099-R: distributions from retirement accounts (i.e. pensions or IRAs)
- 1099-S: proceeds from real estate sales
Independent Contractor vs. Sole Proprietor
While dealing with taxes, you might think that “independent contractor” and “sole proprietor” are synonymous. Yes, there are overlaps, but they’re still distinct and separate terms.
An independent contractor is someone who provides services to a client or business, but they’re not considered an employee. Typically, they work under a contract or agreement, and they have control over how the work is completed. Examples of workers here are freelancers, consultants, gig workers, and other self-employed individuals.
A sole proprietorship is actually a type of business structure, and it’s owned and operated by an individual. It’s the simplest form of business ownership and it isn’t a separate legal entity, which means the owner and the business are the same for legal and tax purposes. Examples here include small business owners, artisans, or service providers.
You may be wondering: what’s the overlap? Well, all independent contractors are sole proprietors, but not all sole proprietors are independent contractors.
For example, a sole proprietor running a coffee shop isn’t an independent contractor. However, a graphic designer can be both since they provide goods and services while running their own business.
Both must report business income and expenses on Schedule C of their personal tax return. In addition, they need to pay self-employment tax, which covers Social Security and Medicare. The upside is that you can deduct business expenses, like office supplies, travel, and equipment.
Does a Sole Proprietor Need a 1099?
Now that you know what a 1099 form is, and the difference between an independent contractor and a sole proprietor, we can tackle the question at hand. The answer is yes, sole proprietors need a 1099 under certain situations.
Let’s explore each scenario below.
Issuing a 1099
Have you paid $600 or more to a service provider (such as a contractor or freelancer) during the year? Then you’re required to issue them Form 1099-NEC for non-employee compensation.
The exception is if the service provider is a corporation. However, there are exceptions within this category, such as attorneys or medical providers.
Receiving a 1099
Have your clients paid you $600 or more for services in a year? Then they’re required to issue you Form 1099-NEC or other relevant 1099 forms.
The good news is that you don’t have to request a 1099 to file your taxes. You can report your income even if you don’t have this sole proprietorship tax form, as all income must be declared.
Key Notes for Sole Proprietors
Regardless of whether you receive a 1099 form, you should always keep track of all income and expenses.
If you work with businesses, then you may be asked to provide a W-9 form before they can issue you a 1099 form. And if you use third-party processors for payments, and have exceeded $600, then you may also get Form 1099-K.
Can Sole Proprietors Have 1099 Employees?
The answer is no, considering that 1099 forms are for non-employees. 1099 workers would be independent contractors, meaning that your company can have either employees or 1099 contractors.
On that note, if you need to form a company, then use our free business registration service. You take care of the state fees, and we’ll handle everything else.
Ensure You Use the Right Tax Forms as a Sole Proprietor
So does a sole proprietor need a 1099? Whether you bill clients or receive services from other people, if the amount exceeds $600, then you’ll have to either issue or receive a 1099.
No matter what happens, it’s vital that you keep records of your income and expenses. That way, it’ll be easier to report these things when the time comes.
Sign up with Business Anywhere to start using our convenient services. Not only do we offer free business registration services, but we also provide virtual mailboxes and online notary services.
