If you have additional sources of income other than the one you typically receive from your employer, you must have heard about a 1099 form. You may receive this form to report your earnings from your side hustle work or the financial investments you’ve made over the years.
But what does it exactly entail? How can the information included be reported on your tax return?
This article covers everything you need to know about a 1099 tax form, its different types, and the series of steps involved in filing for non-employment income.
Table of Contents
- 1 What Is a 1099?
- 2 Who Should Be Receiving a 1099 Form?
- 3 Types of 1099 Forms
- 4 How to File a 1099 Form?
- 5 How to File 1099’s Electronically?
- 6 What Happens If You Miss the 1099 Filing Deadline?
- 7 What are the 2021 deadlines for 1099 forms?
- 8 Conclusion
What Is a 1099?
A 1099 form reports the different types of income that a person earns through non-employment income. The taxpayer must fill out the form and report it to the IRS for federal tax purposes. Whether it’s interest income and cash dividends you receive from owning stocks or your income from selling personal property, a 1099 will be issued to you.
There are many different types of 1099s for the various ways you might have earned non-employment income. If you’re a small business owner contracting work or a freelancer earning more than $600 in non-employment income, you’ll be dealing with a 1099-NEC form. Having more than 20 versions, 1099 forms are essential as they keep track of income not recorded in a person’s monthly salary.
Once you’ve completed filing the tax form, the internal service revenue matches them against your 1040 form that individual taxpayers use to file their annual income tax returns. The form determines whether additional taxes are owed or whether the filer is entitled to receive a tax refund. If the forms don’t match, the IRS sends out a CP2000 notice to taxpayers indicating that they need to owe more money in taxes. Even if someone doesn’t receive a 1099 form, they are still responsible for paying the taxes on any income earned throughout the year.
A 1099 form is typically sent to taxpayers by Jan.31 of the year and usually is due by April.15. Since taxes are not withheld from the additional income workers might be earning, they often fail to save enough to pay their income taxes.
Who Should Be Receiving a 1099 Form?
A 1099 form is most commonly sent to freelancers, independent contractors, stock owners who received cash dividends, and others who received non-employment compensation during a tax year. However, simply receiving a tax form doesn’t always mean that you owe taxes on your income. You might have to face deductions that create an offsetting impact and are usually based on the characteristics of the asset that generated that particular source of income.
In addition, they let taxpayers know about the various transactions they might have carried out. So, for instance, if you settle a debt with a credit card issuer for less than what you owed, the issuer will report that amount forgiven which is usually regarded as taxable income. Workers who receive a 1099 form and are earning on a per-job basis typically don’t have money withheld for taxes and are responsible for calculating the taxes themselves.
As of 2020, independent contractors or freelancers who earn $600 or more in income during the tax year will be sent a 1099-NEC form. The form indicates the money the client has paid to freelancers and independent contractors to get work done. If you paid an independent contractor less than $600 during the course of the year, then you won’t be required to send a 1099-NEC form to them. The form will have your social security number or taxpayer-identification number on it. This means that the IRS is well-informed about the money you have received and will find out if you don’t report the income you’ve accrued on your tax return.
Conversely, if you’re being paid through a payroll account, you will receive a W-2 form after the end of the tax year. But if you have been paid $600 without having any taxes withheld by your employer, you will then have to pay the taxes individually and consequently fill out a 1099 form. Thus, whether or not the payer/business has your correct address, your information will be reported to the tax authorities based on your social security number.
On the other hand, businesses that pay contractors and freelancers will require them to fill out a W-9 form, called the Request for Taxpayers Identification Number, which collects the person’s social security number in order for the IRS to identify the payer and the payee. Even if the business doesn’t file a 1099 form and the taxpayer still hasn’t received it, they might report it under miscellaneous income.
Types of 1099 Forms
You might come across many different types of 1099 forms depending on the kind of income you’ve earned during the tax year. People who aren’t considered as employees receive the 1099-NEC or 1099-MISC forms.
Listed below are some of the most popular forms you might be needing to report the income you’ve earned on your tax returns:
A 1099-MISC is used for reporting any income that doesn’t fall within the categories stipulated in other 1099 forms. It comprises various types of miscellaneous compensation such as rents, prizes, medical payments, payments to an attorney, and so forth. An individual or an entity can file a 1099-MISC form for people who’ve paid at least $10 in royalties or broker payments and $600 or more in miscellaneous income during the tax year.
Additionally, the form can also be used to report direct sales of at least $5000 of consumer products to a buyer of resale anywhere other than a permanent retail establishment. The payer must send the form to the payee by Feb.1 and file it with the IRS by March.1.
A 1099-NEC form is filed to inform the Internal Revenue Service about the $600 or more in payments you’ve made to independent contractors. Thus, if you’re an independent contractor, it’s not your responsibility to file a 1099-NEC form. Yet, you should be receiving a copy of a 1099-NEC form from your client.
Independent Contractor Definition
By definition, an independent contractor is anyone you hire on a contractual basis to complete an assignment or a project. They’re not recognized as employees. Common examples include graphic designers, web developers, and content writers.
If you hire a freelancer through a third-party provider such as UpWork, you won’t be required to submit a 1099-NEC for them, and the same applies for paying a contractor less than $600 over the course of the year. Sometimes an independent contractor will be registered as a C corporation or an S corporation, and if that is the case, you wouldn’t need to file a 1099 form for those who come under the said categories.
However, you should remember that if you’re working as an independent contractor, you would still need to report your income even if you did $600 or less worth of work for your client and did not receive a 1099-NEC form.
If you have accrued income from the sale of securities and some types of bartering taking place via barter exchanges, you will likely receive a 1099-B form. A 1099 may not be required if you bartered with someone directly but may have to report the income on your tax returns.
One of the common reasons you might receive a 1099-DIV is because you receive dividends on the stocks you hold or make capital gains from a mutual fund you’ve invested in. Your receipt of dividends may require you to attach a schedule C to your tax returns. Even if you don’t receive a 1099-DIV form, you still have to pay your taxable dividend income. Dividends are usually in the form of cash payments paid to investors as a reward for owning shares in their corporations.
A 1099-C form is filed to report a forgiven debt of $600 or more. The lender sends the form to the Internal Service of Revenue and the borrower who uses the form to report the canceled debt in their income tax returns. Even if you manage to settle your debt with your lender, the amount that has been forgiven will count as taxable income. However, according to the IRS, there are certain situations where the canceled debt may not be taxed. In the event of bankruptcy, insolvency, or death, the rules may not apply.
In addition, you may not be required to report certain types of mortgage debts that are tax-exempt. The Mortgage Forgiveness Debt Relief Act of 2007 grants individuals the ability to 2 million dollars worth of debt forgiven by a lender if it involves a foreclosure or restructuring of a mortgage with a lower principal amount on a primary residence.
A 1099-S form is used for reporting the income from the sale or exchange of real estate and royalty payments. It includes the gains and proceeds from various real estate transactions such as the sale of land, industrial buildings, and residential properties. If you receive the form 1099-S, you are required to report the sale of the property on your tax return even if you don’t have to pay taxes on any of the gains.
A 1099-INT form is sent to taxpayers if they have earned more than $10 worth of interest during the tax year. You might receive this tax form from your bank as it paid you interest on your savings. The IRS will be immediately informed about the interest you earned through your social security or tax identification number. Moreover, all payers of interest must send the form to investors towards the end of the year and include a breakdown of all types of income earned from the interest.
Financial institutions pay interest to account holders as compensation for their use of the deposited funds. The interest received by the account holder/investors is taxable and must be reported to the IRS. Interest paid on bank deposits, accumulated dividends paid by a life insurance company, or amounts from which foreign or income tax was withheld will all be reported in a 1099-INT form.
In addition, interest of $10 or more accrued to a real estate mortgage investment conduit (REMIC) or a financial asset securitization investment trust (FASIT) regular interest holder, or paid to a collateralized debt obligation (CDO) holder, must also be reported here.
A 1099-R form is used for reporting taxable distributions from charitable gift annuities, retirement plans, pensions, or insurance contracts. You may generally receive this type of form if you receive distributions of $10 from the sources mentioned above. Retirees who make withdrawals from their 401k accounts are likely to receive a 1099-R.
The form is typically provided by a plan issuer who is responsible for giving the copy to the IRS, the recipient of the distribution, and the applicable local tax department. People actively working may also receive the form if they take an early distribution from an IRA (Individual Retirement Account).
How to File a 1099 Form?
There are two copies of a 1099 form: Copy A and Copy B. If you hire an independent contractor, you must report what you pay them in copy A and subsequently report the same information on copy B. Once the contractor receives copy B of the form from their client, they won’t be required to send it to the IRS; instead will have to report their income listed on Copy B in their personal income returns.
Before submitting the form, you will have to ensure the total amount you paid the contractors during the tax year, their legal name, address, and taxpayer identification number, which can be acquired by asking them to fill out a w-9 form.
Copy A of the 1099 form must be submitted to the IRS by january.31, regardless of whether you’re filing electronically or by mail. However, if you are filing a physical form of 1099-NEC, you won’t be able to download and submit a printable version of copy A. Instead, you must acquire a physical form of the 1099-NEC form, fill out Copy A and send it to the internal revenue of service. Once you’re finished completing your 1099-NEC form, you are then required to send copy B to all the independent contractors that work for you no later than Jan.31, which can also be downloaded through the IRS website.
If you’re filing a physical copy A of the 1099-NEC form to the IRS, you will also be required to complete and file form 1096. Formally titled “Annual Summary and Transmittal of US Information Returns,” the form is used for reporting non-employee income to the IRS. The IRS uses the 1096 form to keep track of every physical 1099 you are filing for the given tax year.
In addition, depending on where your business is located, you may have to file 1099 forms that comply with the respective state’s filing requirements.
How to File 1099’s Electronically?
The first step is to prepare all the documents you need to file a 1099 form. By the time you’ve begun the process, your contractor should’ve already provided you with a completed W-9 form. If the form has inaccurate information or is submitted late, you are legally allowed to withhold 28% of the pay. A W-9 form includes useful information about the contractor, which tells you if you need to create a form for them. Their name, address, tax filing status, and social security number are some of the essential components of the form.
Furthermore, you must obtain a 1099 form from an official source since you won’t be able to print the forms off the internet. Hence, it is ideal to acquire the forms directly from the IRS or any local accounting firm that sells those forms. Conversely, if you’re working with an accountant, they can provide you with the appropriate forms. You may also order them online via any office supply store’s website.
Once you’ve gathered all the data and the necessary forms, you’re just a few more steps away from its completion. While filling out the form, you will be required to provide the following information:
- Your social security number or employer identification number
- The amount paid to the contractor
- The contractor’s name, address, and SSN/EIN
- If any payment was withheld and by what amount
You will be required to fill out two copies for each contractor that worked for you: Copy A, which can be filed through the IRS filing a return electronically (FIRE) system, and copy B that must be sent to the independent contractor on or before February 1 so that they can include it in their personal tax returns.
To submit your 1099 form via the IRS online submission system, you will need a Transmitter control code (TCC) which can be requested by filling out form 1149 and then mailing it to the IRS. You must submit it at least 30 days before the deadline of your 1099-NEC form.
After the IRS contacts you with your TCC, you’ll be able to use it to create an account with the FIRE system. Moreover, copy B can be sent electronically to the contractor only after you’ve received their consent.
Your request for consent must comply with the IRS rules and include the following:
- The duration of their consent; whether they want to receive an electronic copy only this year or every calendar year they may work for you?
- Instructions providing details on how to request a paper copy from you even if they’ve decided to receive an electronic one.
- Outline of the conditions under which a statement may no longer be provided, including cancellation of the contract or receiving less than $600 in pay for their services.
- Procedures that need to be undertaken to share their information with you.
- A guarantee that they’ll receive a physical form if they do not consent to receive an electronic copy.
What Happens If You Miss the 1099 Filing Deadline?
You will be incurring a penalty from the IRS based on when you file the accurate information return. You will then have to pay the following penalties if you miss the deadline:
- $50 if you file within the 30 days of the due date
- $100 if you file after 30 days but before August 1 of the filing year
- $260 if you file after August 1
If you intentionally miss the deadline, you will be subject to pay a minimum penalty of $530 per statement. In most cases, the IRS can impose an additional penalty. Conversely, if you’re unable to file on time due to some circumstances, you can request an extension by submitting IRS form 8809. You can file form 8809 online by completing its fill-in form through the FIRE system for an automatic 30-day extension. However, this extension is not applicable on the deadline for submitting a copy of the 1099 form to your independent contractors.
The IRS will only reconsider a penalty if you provide reasonable grounds for not filing the form on time. Hence, you must demonstrate that the error was due to unforeseen circumstances or factors not within your control. For that, you will have to provide an explanation with supporting evidence to strengthen your claim and that you acted in good faith to avoid missing the deadline.
However, if you’re unable to provide a reasonable cause, the IRS may exempt the greater of ten 1099s or ½ percent of the total 1099s you are required to file for the calendar year. So, if you’ve filed the 1099’s but failed to include all the correct information, then you can qualify for this exemption and ensure that you make the corrections by August 1.
What are the 2021 deadlines for 1099 forms?
If you’re a business that has hired contractors to work for you, the deadline to file copy A with the IRS is January 31 of the calendar year. The same deadline applies for sending copy B of the 1099 form to your contractors.
While there is no 30-day extension to file form 1099-NEC, an extension to file may be available under certain circumstances that demonstrate a reasonable cause.
The procedures that go into filing a 1099 form may seem cumbersome at first, but do bear in mind that it can save you from the penalties you might incur. Moreover, given the growth in the number of contractors providing their services, you must keep yourself updated with the federal tax laws and the filing requirements.
A 1099 form reports non-employment income that a taxpayer has earned throughout the year. It helps the IRS prevent tax evasion and ensures that all types of income from different sources are reported.
Thus, you must seek the help of a tax professional who can guide you further on how to report your non-employment income and the series of steps involved in filling out the different types of 1099-forms.