Taxes are a stressful and puzzling topic for everyone -- especially for independent contractors and freelancers. This is because self-employed workers are entirely responsible for tracking and paying their own taxes on income from multiple sources, in different sums, and on varying schedules. Having a handle on taxes for the self-employed is something that takes a lot of energy, comes with a learning curve, and requires constant maintenance.
So, it's not surprising that many independently-employed individuals are confused about what 1099 IRS forms even are, as well as:
when you are required to issue a 1099
what to do with one if you receive a 1099
if I don't receive a 1099, do I have to report income
what to do if you expect but don't receive a 1099
In this article, you'll get clarifications to those tax questions -- as well as learn how the Bonsai Tax app can take over the bulk of tax management for you, sparing you from having to comprehend the complex (and constantly updating) IRS tax rules, rates, forms, payment schedules, and all the other cumbersome accounting upkeep.
What Is A "1099 Worker"?
First things first: why do you even need a 1099 form?
Self-employed taxpayers (known as 1099 non-employee workers) pay taxes somewhat differently from their salaried-employee taxpayer counterparts (known as W-2 employees). W-2 employees don't need to figure out their income or calculate their "pay-as-you-go" taxes: they just have to instruct their employers what percent of taxes to withhold from every paycheck (by filling out a W-4 form at the beginning of the tax year), and they are set.
Self-employed freelancers, on the other hand, are responsible for keeping track and accurately reporting their income to the IRS -- and they do this primarily by receiving a 1099 form from every client who contracts $600+ worth of labor from them. They are, likewise, required to issue a 1099 to other freelancers from whom they contracted $600+ worth of labor to benefit their businesses.
What Are 1099 Forms?
A form 1099 is an "information returns"-type of IRS form used to report non-employee payments made/received between freelancers and their clients.
Forms 1099 exist in several versions, depending on the nature of the non-employee compensation being reported.
Types Of Tax Form 1099
In 2021, there are 20 types of form 1099. The most common among them are:
1099-DIV (Dividends And Distributions)
Form 1099-DIV is sent to taxpayers who are investors -- by banks, investment firms, and other financial institutions -- to report their dividend earnings.
1099-S (Real Estate Transactions)
Form 1099-S is used to report payments/proceeds from closing a sale or an exchange on real estate within the tax year.
1099-G (Government Payments)
1099-G is the form to report payments collected by the business owner from the federal, state, or local government. For example, local tax refunds and unemployment benefits are reported on this form.
Issued by banks and other payment processors, 1099-K exists to report payments for virtual sales transactions made possible by third-party platforms.
1099-R (Retirement-Related Distributions)
Form 1099-R is used to report getting a payout from a retirement plan, pension, or individual retirement account (IRA). Certain annuities and life insurance contracts may elicit an issuance of this form as well.
1099-INT (Interest Income)
Form 1099-INT is issued to the taxpayer when they earn more than $10-worth of interest from banks as well as brokerage and other investment firms.
1099-NEC (Non-Employee Compensation)
1099-NEC is the most frequently-used IRS form to report freelance income by non-incorporated independent contractors (this function was previously fulfilled by form 1099-MISC, but not anymore). With a few exceptions, 1099-NEC is filed to report payments of $600 and above from clients and employers.
1099-MISC (Miscellaneous Income)
Prior to 2020, form 1099-MISC was used for what 1099-NEC is used now -- as the primary means for most self-employed workers to report their non-employee income. 1099-NEC was introduced in 2020, and now, form 1099-MISC is used to report miscellaneous income that does not fit into other 1099 forms, such as money gained from prizes and awards, as well as rent, attorney fees, and royalties.
Who Files Form 1099-NEC?
If you, as an independent contractor, paid another independent contractor $600+ for their services pertaining to running your business, you need to issue that contractor a 1099 form -- with a copy to be sent to both, the contractor and the IRS.
The deadline for filing a 1099-NEC form for the 2021 tax year is January 31st of the following year 2022 (read detailed instructions on how to file form 1099-NEC here).
The IRS can impose penalties for 1099 late filing, with fines ranging $50-270 per missing 1099 form, depending on how far past the deadline they are. The maximum late-filing penalty a business can incur per tax year is $556,500.
Where To File 1099s With The IRS
1099 forms can be printed out and mailed to the IRS but the easiest and fastest way to get the 1099s to the IRS is to file electronically via the "Filing Information Returns Electronically" (FIRE) system (this will require opening a free FIRE system online account).
Best Practices For Filing A 1099 Tax Return
If you are filling out 1099s for independent contractors you hired to help with your business, the following practices will keep you on top of your 1099 "game":
Request updated W-9 forms from any contractors you hire (technically, the client is required to have the freelancer fill one out before they pay them).
Maintain steady bookkeeping throughout the year. This way, your records will always be accurate and updated, making filing 1099s quite easy.
Double-check your 1099s for errors and outdated info before sending them out. Making sure that each 1099 is filled out correctly will ensure that there aren't any inconsistencies for the IRS software to stumble over when it is processing your tax return.
Who Receives Form 1099-NEC?
If you, as an independent contractor, sold your services to a client/employer for at least $600 for the tax year, that client/employer owes you a 1099 form.
A Freelancer Who Doesn't Get A 1099-NEC Must Still Report That Income
If you did not receive Form 1099-NEC from every single client who paid you $600 or more for your work, it does not mean you can omit reporting the income received from those clients to the IRS. There's a penalty for not filing 1099 income.
Don't I need All 1099 Forms To File Taxes?
U.S. taxpayers are taxed on all income (except for money that is gifted). It is, ultimately, their responsibility to make sure the IRS gets their tax payments in full and on-time -- as well as to pay all the IRS penalties, if the taxpayer fails to comply with their rules.
In the meanwhile, 1099s going missing is not a terribly rare occurrence. Sometimes they simply get lost in the mail; there are also times when they should have been issued but weren't for negligence or fraudulent intentions on behalf of the client/employer.
You cannot be held responsible with how others handle their bookkeeping or compliance with the IRS guidelines -- but you are responsible for covering all the legal bases on your own end. So, even if you did not receive the appropriate 1099 from some of the clients, it is up to you to make sure you report it on Schedule C (the "Profit or Loss from Business" portion of Form 1040) when you are filing your tax return.
Keep in mind: you only receive a 1099 form for earnings on at least $600 per tax year -- so, you may still have any number of under-$600 earnings you are required to report on Schedule C, even though you don't get a 1099 for those.
Penalties For Not Reporting All Income
Not reporting all possible income means paying fewer taxes . The IRS obviously does not like that -- and throws any number of disincentives in the form of financial penalties at taxpayers who are caught not reporting or under-reporting their freelance income.
One way to get caught is this classic scenario. Your client filed a 1099 for you -- and a copy reached the IRS -- but your copy got lost in the mail. Not receiving a 1099, you assumed that this client simply didn't bother to report it on their end. So, you decided not to report the income you received from that client to the IRS either. Of course, the IRS did get the 1099 -- and now they know that something is "fishy" and will be contacting you for further clarification...
The IRS punishes the business owner for under-reported and mis-reported income (known as "Section 270A Of Income Tax Act") by imposing 50-200% penalty on the tax liability for the under-reported portion of the income, depending on whether it's ruled to have happened due to negligence or fraud.
Avoiding Trouble With The IRS
Does all this tax talk makes you want to immediately curl up on the couch and go to sleep -- or, alternatively, gives you enough anxiety to keep you awake at night? You are certainly not alone in feeling put off by doing taxes.
The good news is that, besides hiring a professional accountant (which is recommended but costly), there are at least two things you can do on your own to anticipate and nip in the bud potential tax-filing problems having to do with 1099s.
Make Tax Information Exchange A Part Of Your Onboarding Routine With Clients And Contractors
One easy way to stay on top of 1099 accuracy is to ensure that clients who hire you -- as well as contractors hired by you -- exchange all the data necessary for issuing each other 1099s.
If You Hire Contractors
If you are contracting someone's freelance services to help with your business, ask for them to send you an updated W-9 form right away, so that when you are filing a 1099, you don't have to go fishing for information at the last minute.
If You Are Hired By Clients
Likewise, if you have been hired on a new gig, fill out a form W-9 on behalf of yourself/your business for every new client/employer you take on as soon as you start doing business with them, and without waiting for them to ask for it (this form is just for informational purposes -- therefore, no need to send a copy to the IRS).
A W-9 form provides your clients with all the information about you/your business they need to correctly fill out a 1099 form when the time comes to do so. It contains:
Your/your business' name
Your address (make sure it's updated!)
Your federal tax classification (e.g. sole proprietor/individual, limited liability corporation (LLC), etc.)
Your tax ID (Social Security Number or Employer Identification Number (EIN))
Signature + date
If your client/employer receives such a form at the offset of your contract, they will be more likely to remember and understand how/when to fill out and send a 1099 to you and the IRS. And if they don't, it is their choice that in no way casts a negative shadow on you! You provided them with all the information to issue a 1099, and as long as you report the income on your tax return anyway, you are in the clear with the IRS.
Get The Right Tool For The Job: Let Bonsai Tax Make Business Accounting Quick And Painless
A major solution to consider for the long term is: using a digital accounting tool that is designed to take the strain and the confusion out of dealing with taxes -- specifically for freelancers.
Our tax program for freelancers can easily file taxes with missing 1099 forms, as long as you enroll the missing income data into it manually -- and will sort, track, organize, calculate, and fill out all the other tax "paperwork" and math you are responsible for as a self-employed freelancer.
tracking your income
scanning business expense receipts into the account
auto-importing bank account/credit card information
sorting all the business expenses into various tax deduction categories (thus upping the write-offs that save you money)
filling out any paperwork that needs to be filed at tax time (i.e. using previously enrolled and updated data, the software fills out your tax return, all income accounted for and all business deductions taxonomized and calculated and filled into the correct IRS forms)
issuing on-demand "profit and loss" financial reports for continuous snapshots of your budget
generating quarterly tax payment estimates (as a self-employed worker, you are required to send in quarterly payments of your estimated income every three months -- and Bonsai Tax software will take care of all the cumbersome calculations in the blink of an eye)
Bonsai Tax is an accounting add-on to a whole Bonsai all-in-one product suite for freelancers, which means you can centralize all your business functions -- from customer relationship management (CRM) tools, to invoicing to multi-member project management, to proposal and other document writing, to additional accounting tasks -- all in one secure, cloud-based online account that's super user-friendly!
Considering that both, Bonsai all-in-one product suite and the Bonsai Tax accounting app are both available for a 7-day free trial, you can see what all the buzz is about for yourself.
The Bonsai Difference
The Bonsai Tax software is great not only because it takes care of all the complex, technical, unpleasant aspects of doing taxes: it also steers you toward developing better business bookkeeping habits. It is truly the best of both worlds! On the one hand, you are completely on top of your accounting and tax maintenance; on the other hand, all the painful aspects of taxes are automated, integrated, and done out of sight by a program designed for this very function, under a 100% accuracy guarantee.
Let Bonsai Tax handle your business accounting -- and save time, effort, and money in your pocket!