Perhaps you’ve seen the stories about Millennials making six-figure gig salaries. That’s good work for a lucky handful of freelancers, but the truth is, most people powering the gig economy earn far less than that lofty amount.
Regardless of your total income from working as a freelancer, gig worker, or independent contractor, you’ll have to report your earnings to the Internal Revenue Service if you made over $400 from one source. You’ll know if you crossed that earnings threshold if you received a Form 1099-NEC (non-employee compensation) in the mail sometime in January for work or services performed the previous year.
Failure to report that income to the IRS can prove troublesome, even if it's a small amount. This article examines the repercussions of failing to file a 1099-NEC (formerly called 1099-MISC).
Failure to Report Income as a Gig Worker or Freelancer
Here’s why it’s of utmost importance to report every penny of your 1099-NEC income: The IRS already knows about it! The IRS has a mirror copy of that 1099-NEC you received in the mail because your employer or the business for which you worked was supposed to file a 1099-NEC for any payments above $400. The payor has until Jan. 31 to file any freelance or gig payments made during the prior tax year.1
Failure to report 1099-NEC income could result in an understatement of your income and tax liability, especially if the amount was several thousands of dollars. You could be assessed a penalty that’s equal to 20 percent of your underpaid tax liability. Extrapolating that into dollars, you could be assessed a fine of $2,000 if you fail to report $10,000 in 1099-NEC income ($10,000/.20 percent=$2,000).
You’ll report 1099-NEC income on your Schedule C, Profit or Loss From Business, when you fill out your Form 1040.
The Other Side of the Coin
We’ve discussed penalties for gig workers who fail to report a 1099-NEC with the IRS. Looking at the other side of the coin, if you paid an independent contractor more than $400 in the tax year, you’ll have to file a 1099. You’ll report this payment on line I of your Schedule C.
Certain deductions, such as write-offs for contract labor, could alert the IRS that you’re supposed to file a 1099. If you failed to report those payments on your Schedule C, you could be raising your hand for an audit. Most likely, though, you’ll be assessed a penalty.
Here are the penalties for the 2022 and 2023 tax years for failure to file informational returns (1099s):2
Tax year Up to 30 days late 31 days late-Aug. 1 After Aug. 1 Intentional disregard
|
2022 |
$50 |
$110 |
$290 |
$580 |
|
2023 |
$50 |
$110 |
$280 |
$570 |
Note that the IRS charges interest on penalties, so your actual penalties could be higher than what’s listed here. Lastly, these penalties are for one missed 1099 – additional penalties could be levied for every 1099 that was not filed or filed late.
Filing is straightforward. You’ll need the payees name, address, Social Security number, and amount you paid them in the calendar year. You should have this information on Form W-9 when you onboard new freelance employees or independent contractors.
The Bottom Line
Employers, businesses, and gig workers should strive to keep accurate and complete records about financial compensation that appears on Form 1099-NEC. A certified accountant can help both parties ensure accurate filing and avoid unnecessary penalties for failing to file a 1099 with the IRS.
1Penalties for Missing the 1099-NEC or 1099-MISC Filing Deadline, TurboTax, https://turbotax.intuit.com/tax-tips/small-business-taxes/penalties-for-not-filing-a-1099-misc-irs-form/L4mwyM8Tk
2 Information Return Penalties, IRS, https://www.irs.gov/payments/information-return-penalties
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
