What is a 1099 Form?
A 1099 form is an income tax reporting form. It enables you to file your tax with the IRS, Internal Revenue Services.
You will normally receive this early in the year, showing you the income you received in the previous year.
This form is however not applicable to every type of income.
It is primarily for the income received through means other than that of employment.
As such, it is common among the self-employed.
These are the freelancers, independent contractors or those in any other form of self-employment.
If you are employed, you could get a 1099 form if you have other sources of income.
For example, you may be having a savings account.
When your bank pays you the interest, that is counted as an earning.
At the end of the year, the bank may send you a 1099 form showing the details of the income received from them.
But there are times you will receive an income and not get the form.
The main reason would be if your income did not pass the $600 threshold set by the IRS.
When an organization has paid you less than $600 annually, then it is not legally required for them to send you the form.
DIFFERENCES BETWEEN 1099 AND W-2 TAX FORMS
There are two forms used to report income. These are the 1099 and W-2 forms.
As you might expect, though serving similar purposes, they are different.
Here are three ways in which the two forms differ.
1. Target taxpayer – form 1099 is issued to independent contractors indicating the money paid over the last year. Form W-2 is given to employees to show their annual pay. For the W-2, there will also be social security and medicare information.
2. Who issues the form – form 1099 is issued by a client while W-2 is given by an employer. Although one organization can issue both 1099 and W-2 forms, they will be going to different people.
The former will go to the independent contractor while the latter will be sent to the employee.
3. Withholding income taxes – taxes which have been withheld will show on the W-2 form but not on the 1099. This is because the pay of independent contractors is not subject to deduction at source. They are responsible for paying their own tax.
The difference in these forms are brought about by the variation in types of workers.
As a result, it is important that the differences be known.
Things can get tricky when workers are classified wrongly.
This could lead to wrong reporting of income, something which could cause trouble with the IRS.
DISTINGUISHING BETWEEN EMPLOYEES AND INDEPENDENT CONTRACTORS
To prevent such a situation, IRS has provided guidelines which anyone making payments can use.
It distinguishes between workers by looking at two factors.
These are the degree of control held by the service receiver and the degree of independence held by the service provider.
To ascertain this, the below considerations have to be taken into account.
This is the control over, or the right of control over, what the worker does, how he does it, where and when.
If the one making payments has this control, then the person he is working with is an employee. Employees are the ones bound by such controls.
They are provided with a working station, directed in the way the work should be done and their time is also controlled.
On the other hand, independent contractors work differently.
The client and the contractor will agree on the delivery of the work.
As far as how, when or where the work is done, that is purely at the discretion of the contractor.
The only important thing between the two is that the work has to be delivered on time.
Of course, this agreement can include more than just the results.
All the same, the way the work is done i.e. number of hours worked per day, working location etc are all to be decided by the worker.
Who is in control of the business aspects of the worker? Who shoulders the burden of his expenses while working? Who provides him with the tools he requires for the work? How and when is he paid?
If the one receiving services has control over all these, then he is working with an employee to whom he will give a W-2 form.
But if he has little to no control over these things, then he is working with an independent contractor.
To avoid confusion, let’s break these things down a little bit.
Provision of tools and a working location is quite obvious—the contractor takes care of that.
But how do payments and expenses come in to determine the classification of a worker?
Well, although there are negotiations and agreements during interviews for employees, the same happens slightly differently when it comes to contractors.
Employees have very little power in these discussions compared to independent contractors.
In most cases, employees will only go with what is offered.
Contractors on the other hand, might push beyond what was initially thought would be the cost.
Expenses incurred by the employee while running errands at work may be catered for using petty cash.
However, this is something which cannot happen in the contractor situation.
He will work out the cost of his services bearing everything in mind then give the final figure.
So as much as there will be an agreement, the contractor has more bargaining power in the negotiations than an employee.
More than that, the agreement is not merely written by the one receiving the services. Independent contractors are actively involved in deciding what goes into the agreement.
Type of Relationship
Is there a binding agreement on the benefits the worker will receive?
Benefits here refer to pension, insurance, vacation pay etc.
If the agreement has these, the worker is an employee. If not, then he is an independent contractor.
Moreover, is the work being done for a set duration or is it more long-term?
Employment agreements tend to be long-term while contracts are usually short-term.
Most take 6-12 months with others going for 2 years. Rarely will they be longer than that.
This is often because contractors prefer working for limited periods with one client.
They opt for this kind of arrangement to allow them work for more than one client at a time if they so wish.
Or maybe just to be able to take care of other personal matters like family.
In the event that a contractor has worked with you for a long time, it will likely be due to contract renewal.
Also, with the renewal of every contract, the contractor might suggest changes.
These will definitely have to be agreed upon by both parties.
TYPES OF 1099 FORMS
Having seen that forms 1099 are for independent contractors, it will be good to realize that there are different types of the form.
These are used to cater for the different scenarios of incomes.
Here are the forms.
This form reports the sale of your home in a foreclosure. The form 1099-A which you receive from your lender will have the details to use in determining the gain or loss.
The foreclosure is treated by IRS as a sale, thus an income.
This is income received through the sale of securities as well as bartering. Bartering usually takes places in bartering exchanges. The exchanges send a 1099-B form to the people who received their income through them.
This form should be received by the income earner latest February 15th.
Form 1099-C is for the income received in the form of debt cancellation. This mainly comes from credit card lenders who may decide to pardon you on some amount you request.
That amount will be reflected on this form as your income.
This is your income reporting form if you received income in the form of cash, stock or other form of property from a corporation.
The corporation gives you cash, stock or property on the basis of your shares. This will normally be occasioned by a change in the capital structure in the corporation. It could also result from the corporation’s acquisition.
This is for investors who receive distributions from investments made during a calendar year. These are meant to be reported during filing. The minimum amount which will warrant an investor receiving a 1099-DIV form is $10.
it is important to keep in mind that not all accounts of an investment nature attract this form. For example, individual retirement accounts, money purchase pension plans and profit-sharing plans are exempt from this.
This form will show up in your mailbox if you have received any payments from the federal, state or local government. What is covered includes state or local income tax refunds, credits, offsets, taxable grants or agricultural payments.
This form will also be used in your filing if you have received payments on a Commodity Credit Corporation (CCC) loan.
The minimum amount paid to warrant the issuance of this form is $10.
If you have received advanced payments from your health insurance, then you will get this form.
The recipients of these payments are usually those of eligible trade adjustment assistance (TAA), Alternative TAA (ATAA), Reemployment TAA (RTAA) or the Pension Benefit Guaranty Corporation (PBGC).
This is for earnings which are a minimum of $10 coming from interest from financial institutions e.g. banks.
This interest may not necessarily be taxable but it has to be reported to the IRS.
This form is used to report payments made through payment cards and third party network transactions. These include debit, credit and stored-value cards.
This form will only be sent out if there are a total of more than 200 transactions and the gross payments total a minimum of $20,000.
This form is for reporting Long-Term Care insurance benefits. Your insurer will send you this if you received benefits lat year.
These benefits could also include life insurance distributions as well as accelerated death benefits.
This is for miscellaneous payments. Among the 1099 forms, it is the most common.
This popularity is because of all the different payments that are reported using it. The payments best known to be under 1099-MISC are those made to independent contractors.
Other payments reported using this form are royalties, rental income, crop insurance proceeds, payments to fishing boat crew members and even Indian gaming profits paid to tribal members.
The form is sent out to anyone whose payments totaled $600 and above for contract payments. For royalties, dividends and tax-exempt interest, the minimum amount is $10.
OID stands for Original Issue Discount. OID is the difference between the issue price and the stated redemption price at maturity. OID is seen as a form of interest, thereby being an income.
There are some exceptions which apply in the case of 1099-OID. They are for tax-exempt obligations, U.S. savings bonds, short-term debt instruments and any obligations issued by an individual before March 2, 1984.
This is for taxable distributions received from cooperatives. The minimum amount for this form to be issued is $10.
1099-Q covers the distributions from Qualified Tuition Programs (QTP) or Coverdell Education Savings Account (ESA).
Beneficiaries must be family members and can include spouse, children, stepchildren, foster children, and their descendants.
The parents of the designated beneficiary as well as their siblings, and in-laws are also allowed to be beneficiaries.
The 1099-R caters for pensions, life insurance contracts, annuities, profit-sharing plans as well as retirement plans.
The form 1099-R is made available to anyone having a distribution of over $10.
Proceeds from the sale and exchanges of real estate are reported though this form.
Real estate in this case covers land, permanent structures, stock in a cooperative housing corporation and non-contingent interest in standing timber.
The 1099-SA is used to report distributions made from a Health Savings Account (HSA), Archer Medical Savings Account (Archer MSA), or Medicare Advantage MSA (MA MSA).
The payments could have been made directly to the medical service provider or the account holder. Transfers from one account to another are not reported.
This is the form that reports the benefits from the Social Security Administration. Benefits cover the retired, disabled and survivors.
This is the form detailing the payments done by the Railroad Retirement Board. Benefits include retirement, survivor, disability, employment, sickness, income tax and medicare.
HOW TO ISSUE AND FILE FORM 1099
If you run a business which has transacted with individuals who are not your employees, you will have to issue them with form 1099.
This will be for every one of them.
But if the amount paid out to them did not exceed $600, then you don’t have to send them this form.
The process of issuing these forms is fairly easy. Below are the steps to follow.
1. Gather the required information – the details you will use to fill the form will come from two sources. The first is your business records and the second is the W-9 form filled by the contractor you engaged.
The W-9 form is where you get information about the contractor. The most important detail is his tax ID number. This will be required in the 1099 form.
2. Fill the form – this form has 5 copies designed like carbon paper. What you fill on the top copy will therefore appear on the copies under it. Ensure you fill the right details in the right spaces.
3. Confirm the details – it is always wise to confirm that the form has been filled correctly. This will help you make corrections early and avoid mistakes which might cost you once contacted by IRS.
Check out some of the common mistakes made during this stage as mentioned in the next section.
4. File the forms – all forms 1099 are supposed to be filed with the IRS by January 31st of the year following the payments. Filing can be done in either of two ways: electronically or by mail.
For online filing, follow the directions provided in this document. If you find this to be the more involving option, then you can go the mailing route. With this route, you will have to fill form 1096 which summarizes the information on the forms 1099.
5. Send copies to the relevant people – this step can be taken as the second part of step 4 above because not all copies of the form will go to the same recipient. Below is the breakdown of who gets which copy of the 1099 form.
- Send Copy A to the IRS.
- Send Copy 1 to the state tax department/authority.
- Send Copy B and Copy 2 to the recipient of the income. They will file Copy B with their federal returns and Copy 2 with their state tax department as applicable.
- Keep Copy C for your records.
COMMON MISTAKES TO AVOID WITH THE 1099 FORM
As expected, mistakes do happen. And they happen quite often.
The first biggest mistake which may be unforgivable by the IRS is failing to file your forms on time.
Not so good.
Some other not-so-big mistakes can still cause you some problems and it will be best to avoid them.
Here are some of them.
- Omitting decimal points or cents from the figures entered. This very small mistake could lead to serious problems as far as the correctness of your forms are concerned. From reporting less amounts to huge ones, you can be sure of facing the wrath of IRS when the time comes.
- Using faint ink to fill the files. The forms need to be clear and the recommended ink color is black. Do not use colors like pink or yellow.
- Adding a dollar sign to the amount you are filling in the boxes. Avoid the desire to help IRS understand that you paid in dollars. It is the only currency they expect you to be reporting.
- Filling the wrong form – this can happen in two ways. The first is filling a W-2 form for an independent contractor and vice versa. The second is by filling the right form, but of the wrong year. Ensure you have the 1099 form dated the year the payments were done.
- Filling the wrong details can cause serious problems. This is why you need to confirm the details filled. Mistakes here could include filling the wrong amounts or the wrong details e.g. the wrong tax ID number.
- Sending the recipient copies to the wrong person – although the IRS won’t come after you if you did this, you will have inconvenienced the recipient. Remember that these forms need to reach the recipients by 31st
Be careful with the addressing to avoid inconveniences both to yourself and the other party.
There you go.
With an understanding of what the 1099 form is, you know what to do when you receive it.
And in case you are supposed to issue it to someone, you have the steps to follow. You cannot get stuck.
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