As a freelance or independent contractor, the 1099s are one of the primary tax forms you will need to deal with a lot. Depending on your line of work, you can get dozens or even more of these forms every tax year.
Getting more 1099s means your endeavor or business is thriving as they are an indication that you did some work and got paid over $600.
Every freelancer, independent contract, and small business owner must understand what these forms are all about and how to treat them when tax filing.
This guide looks at some of the most common questions taxpayers often have about the 1099 and provides answers to help you understand these vital tax forms better.
1. What is 1099?
An IRS (Internal Revenue Service) 1099 forms are an "informational return" form meant to inform the IRS of the taxable income for non-employee workers.
The 1099 forms will include important information such as the taxpayer identification number for both the payer and recipient, the purpose of the payment, and the amount of non-employee compensation. Any other information included depends on the specific form 1099 type, as there are several kinds.
Clients and businesses prepare these forms for freelancers and independent contractors to show that they have paid for work done by these non-wage workers. The forms are sent to both the IRS and the workers.
Besides non-employee compensation, the 1099s also report compensation for other things like prizes and awards, interest income, dividends, and tax refund.
2. What is the primary purpose of form 1099?
The primary purpose of these forms is to report compensation for non-employees to the IRS. Businesses are mandated by the law to report any non-wage payment they make to the IRS to make it easier for the tax authorities to keep track of the wage earner's taxable income.
Additionally, the forms make it easier for non-employees to track their income for the tax year so that they will have an easier time when it comes to filing taxes.
Unlike employed individuals whose taxes are withheld, freelancers and independent contractors have to pay their own income taxes. The IRS form 1099 makes it easier to determine how much they owe in taxes.
That said, the primary purpose of the 1099 form will also depend on the type. For example, 1099-NEC reports non-employee compensation while 1099-MISC reports miscellaneous income, and 1099-INT reports interest income.
3. Who should get a 1099 form?
Any freelancer, independent contractor, and even employees doing side gigs should receive a 1099 tax form when they get a payment of more than $600 in non-employee compensation.
However, there are some exceptions to the $600 1099 form rule. For example, you will still get a 1099 form if you receive more than $10 in interest income from a financial institution such as a bank.
4. Are all 1099s the same?
There are over 20 different 1099 form types for reporting various kinds of payment to freelancers, independent contractors, attorneys, and other contractors.
Here are some of the most common types and their purposes:
1099-NEC: This form reports n0n-employee compensation to self-employed individuals like freelancers and independent contractors.
1099-MISC: When you receive payments like royalties, awards, and rent, you will receive the 1099-MISC form that reports miscellaneous income.
1099-DIV: If you receive cash payments for dividend income or earnings/distributions from other investments, you should expect to get the 1099-DIV form to report these earnings.
1099-INT: You may or may not have to pay taxes for interest payments, but you should expect to get this form 1099 as you still need to include information for these earnings as you file taxes.
1099-A: You will receive a Form 1099-A when your mortgage lenders cancel your mortgage or even just a part of it. The IRS treats canceled debt as a form of income, and so it is taxable.
1099-B: The 1099-B will report income for the sale of securities and bartering transactions that take place in a barter exchange.
1099-S: Earnings from real estate transactions will be reported in the 1099-S form. Real estate transactions can include the sale of your house and other transactions that are not taxable.
5. What is the difference between W2 Employees and 1099 Workers?
The main difference between W2 workers and 1099 employees is how they report their taxes. W2 employees are wage-employed workers, and the employer does most of the tax filing for them.
As a W2 employee, your employer withholds and submits your taxes to the IRS every month, and so you will only need to file your tax return form and not pay any taxes at the end of the tax year.
Form 1099 employees are freelancers who have to work on all the tax documents independently. These workers are responsible for keeping track of their income and expenses to determine their taxable income and tax owed.
1099 workers have to file taxes as quarterly estimated tax payments. Since they do not have an employer to withhold the amount every month, it is the individual's responsibility to set aside some amount every week/month or from every paycheck for taxes.
6. How do you file your 1099 income taxes?
Form 1099 is a source of information when filling out your tax form for the tax year. You will not need to attach or send it to the IRS together with your other tax forms. However, if you are filing taxes with a tax preparer, you must include the 1099s as part of the documents you provide.
Filing taxes with 1099s is a little different from filing with W2 forms. First, these forms allow the 1099 workers to make certain tax deductions that W2 employees are not entitled to, such as home office deduction, office supplies, and business travel expenses.
Another essential aspect of filing taxes with 1099 forms is that the workers must pay self-employment tax that covers social security and Medicare taxes for the tax year. The employer withholds these taxes if you are a wage employee.
1099 workers do not have to wait until they get accurate calculations of what they owe before they file taxes, as the IRS allows them to file quarterly estimated taxes. You can use the 1040-ES tax form to determine your estimated tax obligation.
7. Do you need a 1099 form to file federal income tax?
Although you will receive 1099 forms from all the payments you get over $600 as a freelancer or independent contractor, you can still file taxes without this form.
It is not mandatory to use these forms when filing taxes, as what matters more is ensuring you file the correct amounts.
The form 1099 makes the process easier but provided you have good records of your income, expenses, and tax deductions, you can still file your federal, state, and local taxes without using form 1099s.
However, it is essential to remember that the IRS also gets a copy of the form from the clients, so you should be careful not to underreport your earnings as this can lead to penalties.
8. What happens if you do not receive 1099s?
It is crucial to maintain proper tax records and track all your 1099 forms to quickly tell which forms you do not receive. That said, there is nothing to panic about if you do not get some of the forms.
In many instances, some clients forget to mail them out, while some dealing with freelancers for the first time do not know they have to send them. Therefore, if you do not receive the forms, you should contact the client and request them to send the form before the deadline.
Being proactive and making sure you fill out a W-9 and send it to the client is also helpful as it ensures they have all the details they need to prepare form 1099.
Even if you still do not get the forms, there is nothing to worry about, provided you file your tax returns in time and accurately.
The IRS will not fine or penalize you for not receiving form 1099, as it is the obligation of the client to send it, and you hardly have any role to play besides doing the work and sending the W-9. However, underreporting your income can attract fines, and the IRS can also flag you for a tax audit.
9. What are the common reason for not receiving 1099s?
Although each situation is different, here are some common reasons why you might fail to receive the 1099s.
Earnings under $600
If your earnings for the tax year are less than $600, you will not receive the form 1099 as this is the minimum threshold set by the IRS. But, there are some exceptions. For example, you will still get the form for $10 or more royalty earnings.
It is lost in the mail
Sometimes the form is just lost in the mail, so it is essential to ensure you provide the correct address and update it with both the IRS and client in case it changes before the tax season.
Your business is registered as a corporation
Clients will not sed Form 1099s to businesses registered as corporations. Only sole proprietorships, single-member LLCs, and partnerships will receive these forms.
10. Are there fines for not filling the 1099 tax return on time?
Whether you are a W2 employee or a 1099 worker, the IRS has fines and penalties if you do not file your tax return before the deadline for the tax year.
That said, most 1099 form-related fines are for clients that fail to submit them on time. If a client misses the January 31 deadline by 30 days, the fine is $50 for each form, but it can go up to $260 if they do not submit the documents by August 1.
Clients that ignore sending the 1099 forms get a minimal penalty of $530 for each form, and the IRS does not have a maximum fine limit, so failing to submit these forms can be pretty costly.
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Form 1099 is one of the most important forms for non-employees. It provides most of the information you need for tax reporting, whether doing it manually, with tax software or using the services of a tax professional.
These forms are vital for state and federal return filing, so all freelancers and independent contractors must know what they are all about and how to use them.
The 10 questions and answers above are the perfect starting point for any non-employee that wants to learn more about form 1099.