Canadian business owners who hire American-based freelancers or contractors may need to issue a U.S. Form 1099-MISC to comply with U.S. law. This article discusses what a Form 1099 is, why it is needed, how to issue one to your freelancer, and its due date.
Details of the Form 1099
A Form 1099 is an Internal Revenue Service (IRS), the tax authority in the United States, form that reports “non-employee” compensation. Freelancers or contractors who work for your Canadian-based business may fall under the category of persons required to be issued a Form 1099-MISC. While determination of who should receive this form should be done by your business’s tax accountant, the general categories for which a freelancer should receive the form are as follows. Note that these are not based on how the worker is paid, how often they are paid, or whether the work is part-time or full-time.
- Behavioural control — Whether the business owner has a right to direct or control how the worker does his or her work, or has received a certain degree of training.
- Financial control — This has a wide variety of meanings, and should be confirmed with an accountant. Items such as whether the freelancer is reimbursed for business expenses is a sign that a Form 1099-MISC must be issued.
- Relationship of the parties involved — Factors may include whether there are written contracts involved and if the freelancer receives certain benefits.
Preparing a Form 1099-MISC
Besides these items mentioned above, one rule is very simple — if the freelancer is paid $600 or more during the year, a Form 1099-MISC must be issued by January 31 of the following year.
There are simple steps involved in preparing a Form 1099-MISC:
Have the freelancer or contractor complete the IRS Form W-9 as soon as possible, preferably the first day of work. This form requires the name of the freelancer or business, their tax identification information, address, and signature.
Using the completed IRS Form W-9, you or your accountant can easily fill in the information needed on the 1099-MISC form. You will use the identifying information from the freelancer and input some of your business’s information, as well as any amounts paid to the freelancer as compensation.
Certain software products, such as Intuit can help make filling out a Form 1099-MISC very easy.
U.S. Form 1099-MISC versus Canadian T4A
The T4A, is also known as the Statement of Pension, Retirement, Annuity, and Other Income. It is prepared by an employer and shows how much a certain types of compensation they have paid you over the year. Basically, the Canadian T4A and the U.S. Form 1099-MISC are equivalents, and are used for the same purpose when it comes to freelancers.
While there are similarities and differences between the forms, they are irrelevant. The bottom line is if you have hired an American freelancer or contractor that meets the requirement for a Form 1099-MISC, you must issue the U.S. Form 1099-MISC. The IRS will never accept a Canadian T4A as an equivalent filing.