What is IRS Tax Form 1099?
IRS Form 1099 is a document businesses use to report taxable payments they have made to vendors and independent contractors for service, rent, and other items. Freelancers and independent contractors receive this form for work they did during the year and use it to report their income to the IRS.
What is a Form 1099?
A Form 1099 is a tax form that businesses use to report certain types of compensation for non-employees – such as payment for professional services, royalties, interest and awards or prizes – paid to other businesses and to people who are not full-time employees of your business.
Businesses submit Form 1099 both to recipients and directly to the IRS. However, the form only reports company-related compensation for intangible assets such as interest or services to other companies and to people who are not W-2 employees of your company. It is not used to report payments for purchases such as inventory or office supplies.
Types of 1099
When most people think of 1099, what comes to their mind is Form 1099-MISC – the form used to report various payments for self-employed and other contractual services provided to businesses that do not employ workers. fulltime. But there are many types of 1099, each yielding different types of payout.
Here are five of the most common types of 1099:
- 1099-MISC: Companies fill out this form for each person they paid during the year for various services.
- 1099-INT: Financial institutions complete this form to report the interest they paid to account holders.
- 1099-DIV: Financial institutions complete this form to report dividend payments and investment distributions.
- 1099-LTC: Insurance companies and government agencies complete this form to report long-term care and accelerated death benefits paid on life insurance policies.
- 1099-SA: Health insurance administrators complete this form to report distributions from Health Savings Accounts, Archer Medical Savings Accounts, or Medicare Advantage Medical Savings Accounts.
The types of 1099 forms you complete (or receive, in the case of a beneficiary) depend on the type of organization you have and the type of compensation you issue or receive throughout the year.
Who is required to complete the 1099-MISC?
All 1099, including 1099-MISC, are completed by the business that pays an individual or business for interest, services, dividends, or other relevant forms of compensation.
If you are a business owner – even an unincorporated sole proprietor – and pay $ 600 or more throughout the year to a business or person who is not a W-2 employee of your business, you must complete a 1099 -MISC form to report payments to that business or person.
Typically, business owners, managers, or accountants complete Form 1099. The form is only intended for businesses that are actively engaged in commerce and make payments to non-employees totaling at least $ 600 over the course of of a calendar year.
The 1099-MISC form is most often used to report these types of remuneration:
- Payment to service companies (such as IT consultants)
- Payment to freelancers (such as writers or graphic designers)
- Interest paid on loans
- Dividends paid to shareholders of a company
In cases like these, where the total payments made to another business or individual exceed $ 600 in a calendar year – and the payments are not covered by other tax return forms, such as a W-2 – the company should prepare, send and file 1099s (even if it is only a sole proprietorship).
When are 1099 forms sent or issued to companies?
The 1099s are used to report your payments to other businesses as well as to individuals. Whether the recipient is an individual, sole proprietorship, LLC, S-corp, or C-corp, any entity to which your business pays more than $ 600 per year for services, rent, interest, rewards, or other intangibles must receive a 1099 that documents their compensation for the year.
You are not required to file a 1099 when the only payments you made to another business were for the purchase, transportation, or storage of tangible property such as inventory.
When to file Form 1099?
If you’re not engaged in a business – or if your only service-related expenses don’t exceed $ 600 per year – you don’t need to prepare 1099 forms.
When your business has beneficiaries who need to receive 1099 forms, you must prepare and send them to them by January 31 of each year. You must then file the forms with the IRS by February 28 (or March 31 if you are filing electronically).
If you receive a Form 1099 from a client or employer, you will need to include the form information on your normal tax return, filed no later than April 15 (or October 15 if you are requesting an extension).
How to complete form 1099
If you need to prepare 1099s for different recipients each year, you will follow four basic steps.
1. Identify eligible beneficiaries.
The first thing to do is review your financial records and identify the recipients you need to send 1099s to. Find people and businesses that you paid more than $ 600 for in the year for rent, services, interest and dividends. Eliminate all full-time employees whose pay will be listed on the W-2 you send them for that year.
2. Complete the 1099.
Once you’ve determined who needs you, you’ll need to download Form 1099 from the IRS and fill it out with the recipient’s information. You should have used Form W-9 to get this information (like their tax ID) when you hired them.
3. Send 1099.
After completing Form 1099 for all affected beneficiaries, send them the forms no later than January 31.
4. File the 1099 with the IRS.
After you send the 1099 to the beneficiaries to report their income, you must file the forms with the IRS by February 28 (March 31 if you are filing them electronically). Be sure to keep a copy for your records.
What are freelancers and independent contractors doing with the 1099?
If you are the one who receives a 1099 – for example, if you are an independent contractor rather than a W-2 employee – this form reports the payments you received during the year, and you will use it to complete your tax returns. [Read related article: Tax-Filing Tips for Independent Contractors]
When you receive a 1099 from a client or employer, there are several important things you should review:
- Information on the payer: This line will show who paid you.
- TIN of recipient: Make sure this number matches your social security number (or your tax ID number if you’re incorporated).
- Recipient’s name : It should be your name or your company name.
- Boxes 1-17: These boxes indicate the compensation paid to you and the taxes already withheld.
Then all you have to do is use the information from your 1099 to complete your tax returns and keep a copy of the form for your records.
What if I get a 1099 and a W-2?
Some people can earn both 1099 income and W-2 income in the same year. Here are some cases where this is common:
- You have a full-time job and work as a freelance at the same time.
- You work in a hospital and by moonlight in a clinic.
- You have one or more clients who use a professional employers’ organization (PTO) to pay their subcontractors.
If you receive both a 1099 and a W-2, you will use both forms to prepare your income taxes. Enter any income reported on your W-2 directly on line 1 of your Form 1040. Income 1099, on the other hand, is usually reported on a Schedule C.
What if I don’t get 1099?
If you work for an employer as an independent contractor and you don’t receive 1099 in January of the year after you work, you still have to report your income.
The first thing to do is to contact the company to see if there was a clerical error – the company may have entered your information wrong or even sent the form to the wrong address. Either way, ask the employer to return the 1099 so that you can get accurate accounting of your business income throughout the year.
Whether or not the company returns your 1099 to you, you should always report any compensation on your tax returns. If you cannot get an accurate 1099, you may need to reconstruct your compensation data using your own bank statements. The employer likely won’t have withheld any tax from your payments, so you should assume that any payments they made to you were taxable. Then you will need to deduct all qualifying business expenses yourself. [Read related article: Self-Employed? Everything You Need to Know About Taxes]