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What Are 1099s?

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1099 forms are federal income tax information forms from businesses and other institutions to document certain financial transactions conducted during a tax year. The forms are filed with the U.S. Internal Revenue Service (IRS) and if required, state tax departments. Copies are also sent to individual taxpayers to help them total their income from various sources and calculate their taxes accurately.

Specifically, 1099s are used to report earnings and proceeds other than wages, salaries and tips, which are reported on the federal W-2 form. There are more than 20 different versions and variants of the 1099 form. Beginning in the 2020 tax year, Form 1099-NEC will be used to report non-employee compensation, one of the most common uses of the 1099.

Those who receive 1099s are expected to use them in preparing personal income tax returns, normally due by April 15. Because taxes are not withheld from wages of 1099 workers, they often fail to save enough to pay their income taxes.

Who Sends a 1099 Form?

1099s are used to report a wide range of financial transactions. The IRS requires individuals, small businesses, companies, financial institutions and others to report money or bartered value of a service or commodity as income each tax year.

The 1099-NEC is among of the most common, generally sent to freelancers are not employees of your business. If you paid a non- more than $600 during the year, who wasn’t considered an employee, you must send that worker a 1099-NEC declaring the amount of compensation you paid.

Under federal law, a business does not need to send out a 1099 to anyone who earned less than $600 in a calendar year, but financial institutions report smaller amounts to the IRS and issue other 1099 forms to those paid investment income such as interest, dividends and capital gain distributions.

1099-MISC is another commonly used form that reports an assortment of payments not tied to non-employee compensation for work.

If you own rental property and a property manager collects the rent and sends it to you, the manager will send you a 1099-MISC. A 1099-DIV is used to report dividend dispersals and a 1099-INT is used to report interest earned of more than $10.

Payers are required to send 1099s by mail during February in the year that taxes are reported. Unlike the W-2, which report employee income, you don’t attach 1099s to your federal 1040 tax returns. They are used to inform the taxpayer how much money was received from a payer. The payer reports that amount to the IRS as well.

Who Receives a 1099 Form?

The 1099s are sent to freelancers, independent contractors, stockholders who received dividends, bank account holders who were paid interest and others who received other non-wage compensation during a tax year.

1099s are used to let taxpayers and the IRS know about a wide range of transactions. If you settle a debt with a credit card issuer for less than you owe, the issuer will use a 1099-C to report the amount forgiven, which is usually taxed as income. Local, state and federal governments also will send 1099s to report tax refunds, credits or offsets.

Workers who receive 1099s usually haven’t had money withheld for taxes and need to calculate how much tax they owe themselves. These often include actors, musicians, writers, consultants, lawyers, accountants, plumbers, building tradesmen, gardeners and other independent workers that receive compensation on a per-job basis.

Starting in tax year 2020, contractors, independent professionals and freelancers who perform $600 or more a year services from a single payer will receive a Form 1099-NEC from the payer.

Information reported on the 1099-NEC formerly was included in Form 1099-MISC but henceforth will be reported on the new form. The 1099-MISC will still be used if you are in a trade or business and paid money to others for reasons including rent, prizes and awards, medical and health care services and payments to attorneys from legal settlements.

If you’re a full- or part-time employee and paid through a payroll account, you’ll will receive a W-2 form after the end of the tax year. If your employer didn’t withhold tax and paid you $600 or more during the year, you will receive a 1099 and are responsible for paying taxes individually.

Businesses that pay contractors and report dispersals with a 1099 will require that the contractor or freelancer fill out a W-9 form. The form, called Request for Taxpayer Identification Number and Certification, normally collects the contractor’s Social Security number so the IRS can identify the payer and the payee for tax purposes.

Who Doesn’t Receive a 1099 Form?

Regular employees of a business do not receive 1099 tax forms. They receive Form W-2 to report income. The W-2 reports all money paid to an employee as well as withholdings for taxes and tax-deferred retirement accounts. 1099-NEC forms are used to report payments to freelancers and other independent contractors and generally don’t include withholdings. If you aren’t an employee on a business’ payroll but receive compensation from a business for services, you will receive a 1099-NEC.

Types of 1099 Forms

People who receive 1099-MISC or 1099-NEC forms are not considered employees. That means businesses are not liable for paying a share of state or federal income taxes or for deducting any payments to the Social Security and Medicare Trust Funds.

Some other common 1099 forms include:
  • Form 1099-DIV: Banks and other financial institutions use it to report investment income.
  • Form 1099-INT: This is to report interest income.
  • Form 1099-G: This lists government payments like unemployment benefits and tax refunds.
  • Form 1099-R: This documents payments from annuities, pensions, retirement plans and profit-sharing plans.
  • Form 1099-C: Used whenever a taxpayer writes off debts exceeding $600.
  • Form 1099-Q: Documents payments from Qualified Education Programs.
  • Form SSA-1099: Records Social Security payments.
  • Form 1099-S: Reports proceeds from rental income and other real estate-related investment and transactions.
  • Form 1099-B: Reports proceeds from broker and barter exchanges.

How and When to File a 1099 Form

Forms 1099-NEC or 1099-MISC reports are used to report money paid to independent contractors who perform services for your trade or business. Payment for personal or household services such as gardening and babysitting don’t need to be reported on a 1099.

Generally, payers are required to submit 1099s to their payees by January 31 of each year, with information forwarded to the IRS soon after. Penalties are assessed on those who file incorrect returns, those who don’t remit correct payee statements in a timely manner and to those who file fraudulent returns.

The IRS matches a payee’s tax returns with received 1099s to discover any unreported or under-reported income on which self-employment tax payment is required. Discrepancies will often initiate a tax audit and/or penalties.

While businesses usually send 1099s to contractors through the mail, most now file required 1099s to the IRS electronically. Many businesses use payroll services to file with the government taxing agencies.

Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].

Sources:

  1. N.A. (ND) The Difference Between a 1099 and a W-2 Tax Form. Retrieved from https://turbotax.intuit.com/tax-tips/irs-tax-forms/the-difference-between-a-1099-and-a-w-2-tax-form/L8drkTeTQ
  2. Fishman, S. (ND) When Do You Need to F8ile Form 1099-MISC? Retrieved from https://www.nolo.com/legal-encyclopedia/when-do-you-need-file-form-1099-misc.html
  3. Murray, J. (2020, June 30) Who Must Receive For 1099-MISC. Retrieved from https://www.thebalancesmb.com/who-must-receive-form-1099-misc-397998
  4. Falconblog (2020, February 15) Form 1099-MISC vs. Form 1099-NEC: How Are They Different? Retrieved from https://falconexpenses.com/blog/form-1099-misc-vs-form-1099-nec-how-are-they-different/
  5. Fontinelle, A. (2019, June 25) The Purpose of the W-9 Form. Retrieved from https://www.investopedia.com/articles/personal-finance/082714/purpose-w9-form.asp