When your Canadian business works with American-based freelancers or contractors, you typically need to issue those workers an Internal Revenue Service (IRS) Form 1099-MISC Miscellaneous Income to comply with U.S. law and international agreements. The workers provide all the information you need to complete this form when they fill in and return IRS Form W-9 to your small business. Neither of these forms apply to U.S. citizen employees, who fill out a IRS Form W-4 Withholding Allowance Certificate and get an IRS Form W-2 Tax and Wage Statement. Regardless of which form applies, you must send it out by January 31 of the year following employment.
What Is a Form 1099-MISC?
A Form 1099-MISC is an IRS form that reports non-employee compensation. In addition to reporting compensation to freelancers and contractors, this form covers received income that spans the gamut from rents and crop insurance proceeds to prizes and awards, medical and health care payments, and any fishing boat proceeds. Most of the time, U.S. citizen freelancers or contractors who work for your Canadian-based business fall under the category of persons to whom you must issue a Form 1099-MISC. Note that the requirements for this form have nothing to do with how you pay or how often you pay workers or whether they work part- or full-time. While your tax accountant can help you confirm which workers need this form, you can generally figure out whether workers qualify as employees based on certain criteria, including:
- Behavioural control, such as whether you have a right to direct or control how workers complete jobs or if they receive a certain degree of training.
- Financial control, such as whether your company reimburses workers for business expenses.
- Relationship of involved parties, such as whether contracts exist between you and the workers and whether they receive certain benefits.
Depending on how any of these apply, the worker may be an employee and not a contractor, in which case you do not need to issue a form 1099-MISC.
How Do You Prepare Form 1099-MISC?
Besides the things mentioned above, one rule is simple: if you pay U.S. freelancers or contractors more than $600 or more during the year, you must issue them a Form 1099-MISC by January 31 of the following year. Accounting software such as QuickBooks Online makes the process seamless by walking you through each step of the process. If you decide to fill out your worker’s Form 1099-MISCs by hand, the simple preparation steps include the following:
- Have the freelancer or contractor complete the IRS Form W-9 as soon as possible, preferably their first day of work. This form requires the name of the freelancer or business, their tax identification information, address, and signature.
- Use the completed IRS Form W-9 to fill in the information on the 1099-MISC form. You use the identifying information from the freelancer and input some of your business’s information, plus any amounts paid to the freelancer as compensation.
What’s the Difference Between U.S. Form 1099-MISC and Canadian Form T4A?
Employers prepare Canadian Form T4A, also known as the Statement of Pension, Retirement, Annuity and Other Income, for contract workers. Basically, the Canadian T4A is a 1099-MISC equivalent, as these forms have the same purpose: documenting how much your small business paid freelancers and contractors for their services over the previous year.
When you hire freelancers and contractors in the United States, you must prepare a 1099-MISC for them. Even though this form has similarities to Canadian Form T4A, the IRS doesn’t accept Canadian forms for U.S. tax returns, just as the Canadian Revenue Agency doesn’t accept U.S. forms for Canadian tax returns. Regardless of your situation, QuickBooks can help you prepare the right forms for tax time while maximizing your deductions. Keep more of what you earn today.