Every year as the tax season rolls around, you’ll witness a plethora of important tax forms waiting for you in the mail. If you happen to have a side hustle, one of these forms might be form 1099, a document that details any earnings you received outside of salary paid by an employer.
While these forms are important for taxes, they can be a little complicated. In the following article, we’ll discuss what 1099 forms are, how they work, what you should do if you receive 1099 forms, and what you need to know if you’re required to send them.
What is a 1099 Form?
The 1099 Form is an IRS tax form for individuals who earn income from other resources outside of the salary paid by an employer. So, if you’re self-employed, you will likely receive Form 1099-NEC from anyone you’ve done work for.
Types of 1099 Forms
Now, there are several 1099 forms used to report different sources of income. This can include anything from unemployment benefits to interest income.
Some common types of 1099 forms include:
1099-NEC: Form 1099-NEC (Nonemployee Compensation) is meant for freelancers or independent contractors. The form details the income received for services you performed for someone who isn’t your employer.
1099-INT: You must file Form 1099-INT, to report any interest income of at least $10 received during the year.
1099-DIV: The 1099-DIV form is used for reporting dividend income, from a stock or mutual fund.
1099-G: You’ll receive Form 1099-G, if you received any government payments, like unemployment benefits.
1099-MISC: Before 2020, any income that you received from self-employment was included on a 1099-MISC. However, with the start of the year 2020, that income is now recorded on your 1099-NEC.
But the 1099-MISC is still prevalent and is used for reporting miscellaneous income, like rent award winnings, or legal settlements.
1099-K: You’ll receive a 1099-K if you receive any payments via credit card or a third-party transaction platform (like Paypal). However, you’ll only receive it if you were paid more than $20,000 or you received more than 200 payments.
1099-R: The 1099-R form is meant for distributions you received from retirement plans, pensions, IRAs, annuities, and profit-sharing programs.
What does Form 1099 entail?
As mentioned above, there are several 1099 forms, each serves a different tax purpose, however, they all contain some common information such as-
- Your personal information (name, address, and taxpayer Id number)
- The payers’ information (name, address, and taxpayer Id number)
- The income you received during the year
- Any tax that was withheld from the income
Regardless of any 1099 form you receive, a copy of the same form will be mailed to the IRS.
What To Do With a 1099 Form?
A 1099 form documents any income that you received, and that income then must also be included on your tax return.
For example, if you undertook a designing gig as a side hustle and got paid. The client will send you Form 1099-NEC reporting that amount. So, you need to ensure that you’ve included the income on your tax return for the year, as you’ll need to pay income tax on it.
The form is an important document used to help you file your income tax return. So if you receive it, you must check it for accuracy. Verify if the following information has been correctly added to the form:
- Your correct personal information
- The amount of income reporting
If anything seems inaccurate, you must contact your client as soon as possible and get your information corrected.
If your information seems accurate, keep a copy of 1099 to file your income tax return. Based on the type of form you receive, the income will be reported in different places on your tax return. For example, income on a 1099-NEC will be reported on your Schedule C, Profit or Loss from the business. Income on a 1099-INT will be reported on the first page of your tax return, Form 1040.
Who Will Receive a 1099 Form?
If you receive income from any entity that isn’t your employer then you will probably receive 1099 to report that income. Under certain circumstances, you may not meet the minimum payment amount to receive 1099.
For example, If you receive less than $600 through gigs for the year, you won’t receive a 1099-NEC reporting that income.
Even if a client doesn’t send you 1099. You must ensure that income is included in your tax return.
You can figure out how much you were paid, by using your bookkeeping system or bank statements to track down payments. It may seem like a hectic task, but including that income on your tax return is necessary.
Who is a 1099 employee?
According to the IRS, any self-employed individual who works as an independent contractor, or a freelancer is considered a 1099 employee.
A 1099 form is entirely different from a W-2 form. If your employer or client sends you a 1099 form, it’s a sign that they see you as an independent contractor rather than an employee.
W2-employees have taxes withheld when they get paid. However, freelancers or self-employed individuals have to figure out their tax burden to both their state and federal government, just like a small business would. Small businesses hire accountants, bookkeepers, and CPAs to handle their accounts and taxes. That’s what the IRS expects from you if you have any self-employed income.
Who Needs To Send 1099 Form?
If you run a business and hired an independent contractor whom you paid $600 or more during a tax year, then you must send Form 1099 to that individual. However, if you paid an independent contractor less than $600, you’re in the clear — you need not file a 1099-NEC to report the payment.
What’s the importance of the 1099 Form?
A 1099 Form is an important taxation form that reports income to the IRS and helps determine your tax liability. It’s important to keep track of all your expenses throughout the year and not wait to see what type of form you receive to estimate how much you’ll owe in taxes.
Even if your employer or client fails to send you the form, you are still responsible for paying tax on that income.
It is also important to keep track of any deductions that may help reduce your income reported on 1099.
It’s recommended to set aside money from income that hasn’t been withheld is a good idea. You can always seek help from a CPA to help you maximize your savings and to determine if making payments periodically is also a smart move. It’s always a good idea to plan, especially when you have 1099s coming to you at the end of the year.
