Independent contractors are often not aware of the implications of Form 1099s. If you receive a 1099, it is important to know how this affects your taxes and what you need to do in order to prepare for next year.
This blog post will outline some of the most popular 1099 questions, and give you the answers you need. We'll also explore some of the things that contractors should be aware of if they have received a form 1099. Let's dive in.
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What is an IRS 1099 tax form, and how does it work?
The Internal Revenue Service (IRS) refers to 1099 forms as "information returns." Other than your employer's salary, you may receive a variety of different types of income throughout the year. These income or payments could include:
- Prizes
- Interest income
- Tax dividends
- IRA distributions
- Dividends from company shares
- Freelancing fees
- State tax refunds
All these payments are reported to the IRS using 1099 Forms. Companies who pay independent contractors or freelancers need to submit these forms to both the IRS and 1099 workers.
What is the purpose of a 1099 Form?
The main purpose of these reporting forms is so that people who do not directly report their income, such as independent contractors, freelancers, small business owners, etc., may still be able to file their taxes correctly (and therefore be exempt from penalties related to filing incorrectly) by using these reports.
For example, if you are an independent contractor who is paid in cash and does not receive a W-2 form at the end of the year, then your client/company should send you a 1099-NEC form. This form reports your income to the IRS and allows you, the independent contractor, to fill out a Schedule C form for self-employment taxes.
Who receives a 1099 form?
Any business or person who has paid a non-corporate vendor more than the threshold amount in any year should send out a 1099 form to that vendor.
If you paid $600 or more in compensation to non-employees, sub-contractors, freelancers, attorneys, or other contractors in the prior year, you must send them a Form 1099-NEC and report the amounts to the IRS.
Do you need a 1099 to file your taxes?
No, you don't need a 1099 form to file your taxes. If you receive a 1099 it will help you file your income returns and avoid potential penalties for filing incorrectly.
What happens if you receive a 1099 but don't report the income?
The penalty for underreporting income or not reporting it at all is usually 5% of whatever amount should have been reported, per month, with a maximum of 25%.
What if you made a mistake on your 1099 form?
It may appear that correcting 1099 mistakes is tough, but it's not. All you have to do is fill out a new, correct form and mail it to the IRS with the "corrected" checkbox checked. By doing so, the IRS will be able to differentiate your new form from others that are either voided or filed for the first time.
Keep in mind that your amended return also needs to be accompanied by a new form 1096.
What expenses can I deduct using 1099 forms?
One of the benefits of being a 1099 worker is that you can deduct some of the expenses that you incur in your line of work. Keep in mind that there are so many deductions you can claim when you’re a solopreneur. Tax software for contractors such as Bonsai Tax can help you identify all your potential write-offs so you can save money come tax season.
This list of expenses below are all possible tax deductions when filing your taxes as a 1099 worker:
- Office Supplies
- Travel Expenses (including gas, airfare, and lodging)
- Internet Related Expenses
- Business Insurance Premiums
- Subscriptions for Business or Professional Publications
- Percentage of your rent (if you work from home)
- Cell phone bill
- Computer software
Also, be sure that you keep good records of the above expenses, in case something gets challenged later. You don't want to get audited without any receipt records.
Note: If you don't want the burden of manually tracking receipts for taxes, try Bonsai Tax. Our software will scan your bank/credit card statements to discover tax write-offs instantly. Users save on average of $5,600 from their tax bill. Try a 7-day free trial today.
What if I have received a 1099 but don't know what it is for?
If you have received a 1099 that doesn't seem to apply to your taxes, then contact whoever provided it and ask them why they sent it. They should be able to tell you whether or not there was actual work done for which the 1099 is intended, or if there was any other reason for issuing it.
What if I think that I should receive a 1099 but the entity has not provided one?
If you find yourself in this situation, follow up with your contractor to see whether they plan to send out their forms. If it's getting close to the deadline and you still haven't received anything, then let them know that you will need to file without the necessary information.
What does a 1099 worker mean?
The term 1099 worker refers to an independent contractor who is not considered an employee by the federal government. If you are an independent worker, you may have heard the term 1099 before in reference to filing taxes at the end of each year.
W2 employees vs 1099 Workers: What’s the difference?
The biggest difference between workers who receive W2s and those who receive 1099s is how their employers report income. When you work as an employee, your employer reports income on form W2 at the end of each year.
W2s have taxes withheld from them already, which means you don't have to pay taxes yourself at the end of the year when filing your federal income tax return.
On the other hand, independent contractors and freelancers use 1099s to report their own taxable income to the IRS. Workers who receive 1099s have complete responsibility for paying their own taxes every year via quarterly estimated tax payments.
In addition, employers do not withhold any of this money from your paycheck so it's up to workers with 1099s to make sure they set enough money aside throughout the year in order to cover their additional tax expenses.
When do I have to file a form 1099?
1099s need to be filed by the end of January for the previous year's earnings. Usually, this means you should have all 1099s sent out by mid-January. If you were paid less than $600, a business is not required to send you a 1099 tax form. If you didn't get a 1099, you still need to file income taxes. You only don't have to file self-employment taxes if you made less than $400 as a contractor.
What details do I need to submit my 1099 forms?
You will want the contact information of your independent contractor, the full legal name of the contractor, their address, and Social Security Number (SSN) or Tax ID Number (EIN).
If you use an EIN, note that you are still required by law to include your company's Federal Tax ID Number on your 1099s in addition to your own SSN. Any interest income should also be reported along with any dividends. Discover the benefits of a federal employer identification number.
Do you need to pay quarterly taxes as an independent contractor?
As a general rule, you are going to have to pay estimated taxes if you expect to owe at least $1,000 in taxes after subtracting your withholdings and credits, and your withholding amount is greater than the smaller of:
- 90% of the tax shown on your current year tax return or
- 100% of your previous year's tax return.
So if you received a 1099 from an employer for this past tax year, add it up again with what you actually made for this past year so far (even if it hasn't been reported yet). If you forget to pay quarterly taxes, you may receive a penalty at the end of the year.
If that number means that next tax season when you do your taxes you will owe at least $1,000 in federal taxes then chances are good that come next April you will have to pay estimated taxes. To learn more, read our guide for filing quarterly taxes.
What are the different types of 1099 forms?
There are various kinds of 1099 tax forms. Here's a brief overview of the most common 1099s to help you navigate any confusion:
Form 1099-INT
Independent contractors who have received interest income will receive this form.
Form 1099-DIV
You should receive this form if you are an independent contractor and have investments that gave you dividends.
Form 1099-R
This form is used to report distributions from pensions, annuities, retirement plans, etc. This also includes any non-employee compensation like participant loans.
Form 1099-S
If someone has paid for real estate transactions (like selling your home or making a profit on the sale of rental property), they'll be required to send you this form that reports the transactions.
Form 1099-B
The IRS uses this information to determine whether investment brokers need to file an information return for customers with transactions that result in gains or losses.
Form 1099-C
If you have received a cancellation of debt that is more than $600, then they will send you this form which is used to report income.
Form 1099-K
This form documents your payments made via credit or debit cards and the third parties involved in those transactions. Also, depending on what State you live in, you may receive a 1099-K instead of a 1099-NEC. Typically, eBay sellers receive a 1099-K.
Form 1099-MISC
The 1099-MISC is a catch-all for income that doesn't fit into any of the other 1099 categories, although it has certain applications. Prizes are one such case.
Form 1099-NEC
Prior to 2020, the 1099-MISC was used to report non-employee compensation.
The IRS replaced the reporting requirement with the 1099-NEC to record money paid to individuals who did work for them but were not employees. In other words, if you freelanced, were self-employed, or had a side business, your clients should provide you with a 1099-NEC rather than a 1099-MISC starting in early 2021. Check out our resource on the steps to file a 1099-NEC.
What if you don't submit your 1099 forms on time?
It's not the end of the world if you miss the filing deadline, but you'll have to pay IRS fines for each late 1099 form. Here are the potential penalties for missing a deadline:
- $50 -- filing within 30 days
- $100 -- filing more than 30 days late, but before August 1
- $260 -- filing on or after August 1
Failing to file your 1099 forms intentionally can attract a minimum penalty of $530 per statement, with no upper limit. How much you're fined is determined by when you submit the correct information return.
That said, if you miss the deadline, you can get an extension via IRS Form 8809. The form, however, can't help you extend the January 31 deadline -- the time you should submit a copy of a 1099 form to 1099 workers.
What are the disadvantages of being a 1099 worker?
The term "independent contractor" sounds appealing to some workers who want to be their own bosses and have more freedom over how much money they make each year without having to deal with being laid off or furloughed by an employer.
On paper, it may seem like there are fewer restrictions when working as an independent contractor because you don't have any taxes taken out of your paycheck or benefits that often accompany traditional employment. You also don't have to deal with the HR department at your company, which means no 401k contributions or health care plans.
The disadvantages of being an independent contractor are that you're responsible for paying your own taxes (you will not see any taken out of your paychecks like you would as a traditional employee) and filing them at the end of each year. You also do not receive benefits like health care or paid vacation time like full-time employees do.
