Very few freelancers and independent contractors will look forward to the annual tax return time. Filing taxes involves a lot of number crunching, and there seems to be endless paperwork involved.
One of the documents or forms you will encounter when filing taxes is the 1099 form. As a freelancer, you will receive a lot of these forms from your clients, and they will be one of the main sources of data for your tax form.
You need to clearly understand this form and how to deal with it, when doing your annual tax return. This guide answers 7 important questions many freelancers often have regarding the 1099 form to make paying taxes less hectic.
1. Who should receive the 1099 form?
The IRS form 1099 records certain forms of income from non-employment activities, and they are usually sent by clients and business owners to freelancers and independent contractors.
Every business in the USA has an obligation to issue the 1099 form to anyone (except corporations) who pay more than $600 as a form of non-employee compensation within the tax year. There are other instances that businesses can issue the 1099 form without having paid out $600, such as when financial institutions issue customers that earn more than $10 in interest income.
Freelancers that receive these forms have to pay self-employment taxes. The IRS requires you to pay the self-employment tax when you earn more than $400 in freelance income, and the fact you are receiving a 1099 form means you have earned over $600, so you have to pay freelance taxes.
2. What are the different types of 1099 forms?
Every freelancer and independent contractor needs to know that there are several types of 1099 forms that you can get depending on the freelance income type you earn.
There are at least 20 varieties of the 1099 forms, but the following are the most popular and what you are likely to get as a freelance business owner.
1099-NEC
Businesses now have to use the 1099-NEC to report non-employee compensation of $600 or more. In previous tax years, they were using the 1099-MISC form.
According to the IRS, a non-employee is anyone hired on a contract basis, such as freelance graphic designers, web developers, and copywriters.
Besides earning over $600 in the tax year, you can also receive the 1099-NEC form, if you receive income from commissions, fees, and royalties. If you are an attorney, you should receive a 1099-NEC form for all payments exceeding $600.
1099-MISC
The 1099-MISC form will report any miscellaneous income that does not qualify for reporting on the 1099-NEC and other 1099 forms. For example, any income you receive from non-employment activities, such as prizes from competitions and awards, will be reported in the 1099-MISC form.
1099-INT
The 1099-INT form is what you receive when you earn an interest income of at least $10 within the tax year. Therefore, you will typically receive the form from interest-paying institutions like banks and investment firms, and it will also be important for your estimated tax payments.
1099-DIV
When you earn dividend income in the tax year, you should expect a 1099-DIV form from the corporation paying the dividends. Dividends are often cash payments, and they will add to your taxable income.
1099-G
If you receive money from the state or federal government such as tax refunds or qualify to get unemployed benefits, you will receive a 1099-G form for reporting this income.
1099-R
The 1099-R form will come if you receive a pension or retirement plan payout. Some life insurance contracts and annuities will also issue a 1099-R form to report the income. However, it is important to talk to a tax professional before filing taxes for pension payments as not all of them are taxable.
3. What else do you need to pay self-employment tax Besides the 1099 form?
Form 1099s are the most important documents that freelancers need to file their income and self-employment tax. However, there is still more information you need to file your tax return as a self-employed individual.
Here is an overview of the other components necessary when filing estimated taxes:
Financial Statements
You need to keep all your financial statements ready to have an easy time filing your estimated taxes. Form 1099 is one of your main financial statements as a freelancer, but you will also need to have others, such as receipts for all the expenses you incur, as they are crucial when you want to identify tax deductions.
Mileage Records
If your freelance job also involves a lot of traveling, you will need mileage records when filing your taxes. You can claim business travel deductions with proper mileage records, which reduces your total tax obligation.
Home Office Expenses
Freelancers that work from a home office also need to keep track of this expense as it is tax-deductible for most freelance professions. IRS allows you to calculate your home office deduction by multiplying the size of your home office in square feet with their prescribed rate per foot.
Form 1040-ES
The Form 1040-ES is also a crucial component when filing your taxes as it allows you to calculate and pay estimated quarterly taxes.
4. Can you pay taxes for business income without receiving the 1099 form?
While most clients and businesses that pay for your services as an independent contract will send the 1099 forms where applicable, some do not know they are obligated to send them. Moreover, sometimes, the forms can get lost in the mail.
Tax payments are still mandatory whether you receive the 1099 forms or not. It is important to keep track of all your income and business expenses so that you can easily tell how much self-employment tax and income tax you have to pay, even if your clients do not send the form.
An easy way to ensure you do not lose track of your income and expenses is by keeping good records using freelancer-specific programs and software. Remember that the IRS also receives a copy of the 1099 forms, and so what you file for your tax return needs to be identical to what they have in their records.
Payments made in cash are a little trickier to report. However, you should still file them even without the forms. Tax professionals will tell you that you are better off filing an extra income the IRS does not have a 1099 form for than failing to report any earnings that the taxman already knows about from your 1099 forms.
5. How do independent contractors use the 1099 form?
The 1099 forms will provide most of the information you need when filing your tax return. If all the clients you work with or in the tax year send all their forms filing taxes should be a breeze for you with little help from a tax professional.
These forms have numbered boxes that make it easy to fill your tax form at tax time. Using tax software will make things even easier by guiding you through the steps to follow when adding information from each form.
1099s will make it easy to estimate quarterly taxes if you know and keep track of your tax deductions as it becomes easy to determine your taxable income. You will get your 1099 forms by January 31 to allow you to file your taxes by the April 15 tax day deadline.
Besides estimating your tax bill, freelancers and independent contracts can use the 1099 forms as proof of work because you only get them after getting paid for work done.
Freelance taxpayers should also file the forms for future references as they help clear things out if you get questions about your annual income from the IRS.
6. Do all the 1099 forms go to the IRS (internal revenue service)?
When a client or business owner sends a 1099 form to the freelancer/independent contractor, they will also mail a copy to the IRS.
Some businesses will send the forms simultaneously to the taxpayer and IRS. Others will send them to freelancers first before the January 31st deadline to allow them to file their quarterly payments on time. Some of these businesses wait a few weeks to collect all the forms before submitting them to the IRS.
The IRS often gets the copies electronically, so it will be easier for them to keep track of your annual income. What you file during tax time should match the IRS's records to avoid issues with the tax authorities.
7. Do freelancers ever have to issue form 1099?
As a freelancer or independent contractor, sometimes the roles will be reversed, and you will have to send 1099 forms instead of waiting to receive them.
A good example would be when you have to subcontract some of the work you take up. If you have to hire someone to do certain components of the work, such as web designing or copywriting, you should send them 1099 forms when you pay them $600 or more.
Before you issue a 1099 form to the freelancer, it is important to ensure you have the correct information about them, such as their address and tax information number. The best way to get the information is by having the freelancer fill out the W-9 form.
Conclusion
Filing taxes is one of those tasks that every freelancer dislikes, as the paperwork always seems endless. Things can be easier for you if you keep good track of your total income and expenses.
The 1099 forms for freelancers make income tracking less hectic as they record all the payments over $600 you receive for your freelance jobs and contracts.
It is always important to remind your clients to send the forms if they forget or don't know they need to do it. However, even if you do not receive any 1099 form, you will still need to file your annual taxes on time and make sure you do not leave anything out as the IRS might already have copies of the forms.
