Anybody who intends to pay taxes on time has to know one or two things about the 1099 tax form. This is especially true for residents of the United States. People you talk to would tell you of the love-hate relationship they have with this tax form. In fact, the only people or group that seems to love form 1099 – in all its various forms – are the Internal Revenue Services (IRS). Failing to fill and, submit these forms on time comes with heavy penalties, which taxpayers are better off avoiding.
It is worth stating that 1099 tax form isn’t a single form. It is a series of forms.
In fact, the IRS calls it “information only form”.
Taxpayers use a different form 1099 to report the type of income they earned. The form is the sort you use to report the income you earned in a year apart from what your employer paid you. Independent contractors, the self-employed, and freelancers use this form. Also, business owners and entrepreneurs use the form too to report the income they earned in any given year. The companies you worked with or provided a specific freelance service to send you the form. They send the form after filling it.
Companies can only send you this form if you were – and still are – their non-employee.
As previously stated, there are different types of 1099 tax form, which include:
1099-INT 1099-DIV 1099-G 1099-R 1099-B 1099-S 1099-MISC
Whoever intends to use 1099 tax form for the purpose of reporting income earned has to choose the most appropriate one. For example, 1099-INT is for reporting interests earned in the course of the year. On the other hand, 1099-DIV is for reporting any dividend you earned. Meantime, any person who wishes to report tax refunds from the state or local authorities should do so using 1099-G. Form 1099-R is the one to use for reporting pensions and payouts from individual retirement accounts.
Form 1099-B is for barter exchanges and broker transactions.
Form 1099-S is the tax form to use for reporting all issues regarding real estate transactions.
It is important to observe time carefully when dealing with the 1099 tax form. IRS expects the payer to know the dates for filing this form to report any income – other than salary from your day job – earned over the course of the year. By law, the date in question here is January 31. Any company that benefited from your freelancing services should send you this form by the last date of January. IRS would then use the form to check if the details correspond with the ones you sent separately in other forms.
Normally, taxpayers take extra care when filling, filing and submitting their tax forms. However, there are times when they might forget to file the appropriate 1099 tax form for a variety of reasons. Now, do not forget that this form is informational. Its purpose is to provide the information IRS needs to confirm the incomes you reported apart from your salary. It is different from other types of tax documents the law requires you to fill. In fact, you do not fill this form on your own. Instead, whoever paid you fills it.
What happens if you forget to file the 1099 tax form?
First, it's worth pointing out that the government already has the information regarding your income. The person who paid you and filled the form already informed the IRS about it. For this reason, your failure to report any 1099 income would not matter. Nonetheless, you will have to contend with a few consequences for your actions. The IRS takes specific actions on such matters. One, it informs you about the 1099 income you failed to report. Two, it charges you retroactively the relevant penalties and interests.
The penalties and interests take effect from the first day on which your payments were late.
If you are hawkeyed, you may notice the error you made before IRS does. In such a situation, you should take a proactive measure instead of waiting for IRS to contact you. Here, filing an amended tax return would be the right course of action to take. The form you should use to file the amended tax return is Form 1040X. The form has different sections or parts. Some sections of Form 1040X are more important than others. The fact you filed Form 1040X does not mean that you are in trouble with IRS or anybody.
What you may not realize is how crucial Form 1040X is hen claiming for tax deductions.
What is more, the IRS requires you to accompany Form 1040X with an explanation regarding the reason for making an amendment. Therefore, do not think you have done your part simply because you filled and submitted Form 1040X. Check that you include an explanation too. Taxpayers are required to fill a separate Form 1040X if they need to make amendments to more than one erroneously filled tax form. Some of the forms whose details you can amend using Form 1040X include:
There is no doubt that 1099 tax form can seem a bit mysterious. The rules and requirements associated with the form leave most business people confused and guessing. Changes regarding the procedures for sending or filing and submitting this form can be a bit hard to track. It is little wonder that most entrepreneurs opt to give up instead of filing the form. However, giving up is not an option if you lack the money required to pay the heavy penalties that IRS might charge you with for late payments or non-payment.
The penalties for failing to file the tax form on time ranges between $30 and $100 for each form. The amount you end up paying depends on the length of time you take from the time the deadline passed. The minimum penalty a business that intentionally disregards the importance of providing correct payee statement has to pay is $250 for each statement. There is no law establishing the maximum amount the business has to pay in such a situation. For this reason, it is better for businesses to pay on time instead of waiting for these possibly costly penalties.
The 1099 tax form serves a crucial purpose. It encourages honesty among taxpayers. It's so tempting to want to be dishonest when filing your taxes. The anger taxpayers feel towards the government, especially with regard to how it uses their taxes, convinces them to withhold a bit of information back. Tax bodies, such as IRS, have the mechanisms to discover you no matter how long you have withheld or refused to pay taxes. With documents such as 1099, the government is capable of smoking you out and punishing you for failure to file tax on time.
Filing the 1099 tax form comes with its own advantages.
In fact, these advantages make this form better than W-2.
For example, you are entitled to partial credits for all your household expenses. Some of the expenses that make you entitled to tax credits include fuel oil, electricity, and rent. The law allows you to deduct up to 10% of what it calls the qualified expenses, which include the ones listed previously. The portion of the house you use for business or trade must be solely for this purpose and none other. With such an advantage, it is little wonder that working as a freelancer, self-employed, or independent contractor continues to appeal to more people.
The other advantage with the 1099 has to do with social security and Medicare. As an independent contractor, you are free to deduct the portion of the taxes in these two categories – Social Security and Medicare – that apply to you as an employer or business owner. The form comes with an added advantage in the area of health insurance premiums too. Here, you can deduct part or all of the premiums you pay each year to keep your health insurance plan running. The deductions apply whether the health insurance is for:
Yourself Your spouse Your dependents
The cover applies to children aged up to 27 years, even if they are no longer your dependents.
The business has to show a net profit for the tax year in question.
The other advantage of the 1099 tax form is you are safe from withheld taxes. None of the 1099 earnings you had for the past one year is subject to tax withholdings. However, you may be the victim of a tax withholding under certain conditions. One such condition is the failure to provide a client with Form W-9. The tax authority can take taxes out of 1099. The taxation can take place at the federal or state level. Therefore, it is important that you understand tax withholding more and learn how it applies to your 1099.
As previously indicated, the 1099 tax form is different from W-2 in more ways than one. The main difference is in the fact taxpayers use 1099 for reporting all the other kinds of income they earned in a year. A W-2, on the other hand, is for the purpose of reporting tips, wages, and salaries.
You should check if a client paid you more than $600 in a single year. If one of your clients paid you this amount, you need to ask them for the 1099 tax form in case they do not send one to you by January 31. Once you receive the form, you will have a few days to check if you included the same amounts in the tax returns you filled and are about to send to IRS. Some people prefer not to ask for the form. In fact, many opt to keep silent thinking that IRS – or whatever tax body they are dealing with – will not find out anything about the yet-to-declared income.
A change of address does not prevent you from your obligations where the 1099 is concerned. IRS does not expect you to file based on your current address. It is true that address is important in tax reportage. However, the address is not everything. What the IRS is more interested in is the Social Security number. Therefore, any information the IRS has on your taxes and incomes is based on the Social Security number rather than address. Nevertheless, ensure that all your payers and IRS have your latest address.
Put a forwarding order with the U.S. Postal Office in case you change your address.
Failure to take these precautionary measures could mean not seeing the tax forms IRS sees.
The IRS has every copy of the 1099 tax form that you have. The only difference is it gets the forms later than you. Nevertheless, make it a habit to report all the 1099s you get to the IRS. Do not assume that the tax body already has the same copies simply because your payers/clients already sent the same electronically. Obviously, there could be a few discrepancies with the form. Normally, you should be able to handle the discrepancies with the payer. In case this proves a bit difficult, highlight the discrepancies when sending your tax returns.
Failure to report 1099 income does not land you in hot soup with IRS alone. Your state could also take a keen interest in the matter and get in touch with you regarding the undeclared income. Most states have their own income tax. They also receive similar information from the IRS. Failure to declare income on the 1099 form while filing your federal returns will not go unnoticed by the state. In such situations, it's better for you to be extra careful and ensure you indicate all that the IRS expects you to.
With this information, you should be in a position to understand 1099 taxes better.
From today, you should take care when you receive the 1099 tax form.
Check that it has the correct details of what the client paid you.
Check that the information on this form corresponds with your tax returns too.