If you’re just starting to work as an independent contractor or freelancer, you’ve likely heard people refer to Form 1099. A 1099 isn’t just one form, but actually a series of forms that report various types of income you receive.
For instance, you may receive a 1099-INT to report interest income received from your bank, or a 1099-R showing a distribution from a retirement account. But if you’re an independent contractor, the form you’re most likely to see is the 1099-MISC.
So we want to find out:
Form 1099-MISC is used to report miscellaneous payments made to non-employees, such as independent contractors. Businesses are required to issue 1099-MISCs to every person to whom the business has paid at least $10 in royalties or at least $600 in services, rents, prizes or awards and other income payments.
If you made payments of $600 or more to any individual or unincorporated business as a small business or self-employed individual, you are likely required to file a 1099-MISC. For instance, say you paid a graphic artist $1,200 to design a logo and website for your business. You would be required to file a 1099-MISC with the IRS by January 31 of the following year.
To issue a 1099-MISC, you must have a valid tax ID number for the recipient. It’s a good idea to get a Form W-9 from each independent contractor or unincorporated business that you hire before issuing any payments. The W-9 simply ensures that you have the correct name, address, and tax ID number to issue a 1099. You do not need to file Form W-9 with the IRS—just keep it for your records.
With the W-9 in hand, you are ready to prepare the 1099. For each 1099 you prepare, you’ll need to include:
Because the 1099-MISC is used to report several different kinds of payments, there are boxes for the various payment types. Payments for services should be reported in Box 7, Nonemployee compensation. Payments to an attorney should be reported in Box 14. If you think any other categories might apply, check out the Instructions for Form 1099-MISC or talk to your tax professional.
All of your Copy A’s of 1099-MISC forms must be submitted to the IRS along with Form 1096, a transmittal form that totals all of the information from the 1099s.
The complicated part of filing Form 1099 Copy A and Form 1096 is that you cannot simply download and submit a printed version of Copy A from the IRS website. Instead, you’ll need to obtain a physical Form 1099-MISC, fill out Copy A and mail it to the IRS. You can order the forms for free online and you’ll receive your order by mail, usually within 10 days.
One last caveat on issuing 1099s: If you paid for services using a credit card or through a third-party payment network like PayPal, do not include those payments in the amount reported on 1099-MISC. Those amounts will be reported on a 1099-K issued by the merchant or payment network.
As a small business owner, there will likely be times where you provide your services to another business, thus receiving a 1099-MISC. If you received a 1099-MISC form from someone who paid you for work performed, you must report the income on your tax return.
How you report it depends on the type of business you own. If you are a sole proprietor or single-member LLC, you’ll report 1099 income on Schedule C, Profit or Loss from Business attached to your individual tax return. If your business is a partnership, multiple-member LLC, or corporation, your 1099 income is reported on the business tax return.
The IRS uses 1099 forms to make sure the taxes owed are paid. It does this by matching the income reported on your tax return to the 1099 forms received from your clients. So if you receive a 1099 that you know to be wrong, you’ll need to act quickly to get It corrected.
First, contact the issuer and ask them to issue a corrected 1099. If the issuer doesn’t cooperate, you’ll need to address this on your own return. For instance, say a client paid you $1,000 during the year, but your 1099-MISC shows they paid you $1,500. You could report the full $1,500 on Schedule C, then add a line on Part V, Other Expenses showing an “expense” of $500 for an erroneous 1099-MISC.
Alternatively, you could report only the $1,000 as income and attach a statement to your return explaining the difference. For example, the statement could say:
Either way, make sure you keep copies of any records to back up the lower number just in case you receive an underreporting notice from the IRS or your return is flagged for an audit.
Reimbursed expenses should not be included on a 1099-MISC, but issuers sometimes include them anyway. If this occurs and the issuer is unwilling to issue a corrected 1099, simply include the reimbursement as income on Schedule C and deduct the expenses as if they had not been reimbursed. The net effect is the same.
If a client paid you $600 or more during the year but you didn’t get a 1099, you still need to report the income. You are required to report all income, even if it is under the $600 threshold.
Sometimes forms get lost in the mail or sent to the wrong address. Sometimes people send out 1099s late or don’t even realize they need to issue them. You could contact the client and ask them for a 1099, but even if they don’t comply, just report your income per your records on your return.
If you are required to issue 1099-MISCs, prepare to file the forms early by requiring a Form W-9 before issuing any payments. If you wait until the end of the year, a simple process can easily turn into a huge headache if the deadline is looming and you’re still missing tax ID numbers.
If you neglect to file 1099s or file late, you could face hefty fines. The penalty for failing to file 1099s can be $250 to $500 per return. And since the penalties apply to both the copy filed with the IRS and the copy filed with the payee, you could be fined $1,000 for each 1099-MISC that you should have filed, but didn’t.
If you have any doubts or questions about 1099 forms, you should consult a qualified tax professional. He or she can help you better understand the requirements, and maybe even handle filing for you.