Are you a freelancer or an independent contractor? Before you file your taxes, make sure you got all the relevant forms and records in place. Among the most necessary forms to feature in your tax calculations is the IRS 1099 form.
But what exactly is a form 1099?1099 is a series of documents the IRS describes as “information returns.” There are various 1099 forms that report different types of income a person receives throughout the year, other than the non-salary income.
Common 1099-series forms include:
- 1099-Misc, Miscellaneous Income
- 1099-DIV, Dividends and Distributions
- 1099-G, Certain Government Payments such as tax refunds and unemployment
- 1099-Int, Interest Income
- 1099-C, Cancellation of Debt
- 1099-B, Proceeds from Broker and Barter Exchange Transactions
- 1099-A, Acquisition or Abandonment of Secured Property
- 1099-H, Health Coverage Tax Credit ( HCTC ) advance payments
- 1099-Q, Payments from Qualified Education Programs
- 1099-S, Proceeds from Real Estate Transactions (rental income and other forms of real estate-related transactions and investments).
- 1099-K, Merchant card and 3rd Network Payments
- 1099-OID, Original Issue Discount
- Form 1099-R: This declares payments from retirement plans, pensions, and annuities, and profit-sharing plans.
The majority of independent contractors and freelancers mostly deal with 1099-MISC; therefore, we will focus more on that.
Form 1099-MISC is a simple IRS document that contains personal info and Tax Identification Numbers (TIN), of both you and your client. Most importantly, it includes the miscellaneous income you have earned as a freelancer or contractor during the year (provided you made more than $600 from the client in question).
Both the 1099 and W2 serve a relatively similar purpose – to declare income you got from various sources throughout the tax year. However, each of the two forms is issued under different situations and requires somewhat different approaches when planning for the tax season.
The most notable difference between 1099 and W2 is that the employer is not supposed to withhold any taxes on behalf of a 1099 employee. On the other hand, A W-2 is a tax statement that you get from an employer who has withheld state/federal taxes, as well as Medicare and Social Security dues.
But you may still be wondering, which of the above forms should you get from your employer, after all, the disparity seems trifling. Usually, the nature of the work arrangement you have with your employer/client will determine which form is the most appropriate for your case.
Without a doubt, if you are working part or full-time for an organization, you will receive a W-2; however, if you are a freelancer or a contractor, you are likely to receive a 1099-MISC. Sometimes, employers may fail to classify employees and contractors correctly, so it is advisable to know where you fall. Check out the IRS 20-Point Checklist, which determines if an independent contractor should be paid on a 1099 or W-2.
Freelancers are self-employed people who offer services, usually working on several assignments for multiple clients at one time. Their popularity is presently on the rise, as one study reveals that 40% of Americans are aiming to become freelancers by the end of the year2020.
Freelancers make nearly all the decisions about the projects they are involved in – where they will work, when to work, as well as the hourly rates they will charge their clients.
In other words, once freelancers take on an assignment or a project, they agree about the project outcomes and deadlines with the client; however, they usually have sole control over how the project is handled. What matters is that the agreed outcomes and deadlines are met in the end.
As we mentioned, they are often referred to as 1099 employees, who have to fill out the IRS 1099 form, and pay their own benefits, taxes, and insurance.
An independent contractor, on the other hand, is an agency or person who takes on a contractual duty to perform a particular service or provide certain materials. Contractors are quite akin to freelancers, though there are a few legal differences between them.
Contractors have less freedom when it comes to what projects and clients they will take on, but the bottom line is, they are considered self-employed by IRS standards. But it is also good to note; not all self-employed professionals are termed as independent contractors.
For instance, you may be selling items you make online. Even though you are in sole control of your work – deciding what items to make, how many, and when they are ready for market – you are likely not be considered an independent contractor.
Professions where people provide their services to the public and can be viewed as independent contractors, include:
Every customer or client of your freelance venture who has paid you $600 or more is required to send you a copy of the 1099 tax form. This should be done not later than January 31, every year. You can also get 1099 from financial institutions or banks if you made at least $10 in royalty income.
While freelancing is among the top reasons why you receive a 1099 form, there are other circumstances where you may find one being issued to you. Below are some of these situations:
When the time reaches for the client to send a 1099 form, expect to receive it:
Sometimes, a 1099 form can get lost on the way, especially if it was sent via mail. If your records show that you earned at least 600 from a client and you are sure they didn’t pay you via a 3rd party processing platform (like PayPal), you should reach out and enquire. Some clients may be unaware that they are supposed to issue the 1099 form, or they may have addressed it to the wrong person.
If a client insists that they aren’t supposed to issue you one, don’t worry. You can still declare your earnings on your tax form, specifically under the additional income segment. As long as you declare all the received income for the calendar year on either the income segment or in 1099 tax form, you will be fine. The problem only arises when you fail to declare income from a 1099-MISC that a client has already reported to the IRS. Since you are meant to get a copy (Copy B) – and the IRS a copy (Copy B) – you would like this info to match.
Confirm the accuracy of the 1099 form as soon as you receive it. You wouldn’t wish to discover inconsistencies on April 14. However, if you find a discrepancy between your records and form 1099, you should straighten out the issue before filing. Like we have said, the client sends a 1099 copy to the IRS; therefore, any disparity may raise a red flag for an audit.
Immediately contact the client if you think the form has errors. Request them to send you a corrected form 1099. At times, it is as straightforward as that! You may need to avail copies of your work records or invoices to back up your dispute. Honestly, the client may not be as motivated to correct these mistakes as you are; thus, it is good to exercise some patience.
Let’s say you forgot to check your 1099-MISC after it was sent, and just before the deadline, you noticed an error. Simply file for an extension. Still, you have to declare your taxes as required; however, this buys you and your customer more time to correct the 1099 tax form.
While it is common for a freelancer or independent contractor to receive form 1099, there are also occasions where you might issue one. If you outsource projects to another freelancer, whatever you pay them may be subject to 1099 reporting. For example, if you paid a web developer $600 to develop a static web page, you would need to issue them a 1099 form. Remember, you have until Jan 31 to send these tax forms to your outsourced workers as well as the IRS.
You should issue a 1099-MISC to every organization or individual that you paid rental income exceeding $600 during a calendar year. The $600 threshold applies to yearly rent payments – not monthly. For instance, if you rent an office in downtown Glendale, AZ, for $300 per month, your duty to file a 1099 form will start after you pay the second rental payment for the year. The IRS recommends that you issue a 1099-MISC at the start of each tax year to give the recipient ample tax preparation time.
The IRS exempts rental payments you make to real estate agents and corporations. Generally, corporations are exempt from all 1099 reporting obligations, except in a few situations. Real estate agents usually represent other businesses in rental transactions as agents or brokers. Thus, if you channel your rent payment to an agent, then you aren’t supposed to complete a 1099 IRS tax form for those payments.
The taxable amount showing from your 1099 form isn’t a permanently fixed number. You have a range of options when it comes to lowering your taxable income via deductions. Usually, these tax breaks result from the money you have spent on carrying out your job – things like traveling to meet clients, buying equipment, and having a home office. You will report these expenses on another form (yes, another form! This one saves you a lot of money, so it is worth it).
By making such deductions, you can significantly reduce the amount that the IRS will tax, and it might be the big difference between keeping your business afloat and closing up shop.
As we wind up, let’s emphasize on a few things. First, form 1099-MISC can be a little overwhelming to deal with but can be exciting too. Always take these forms as forms of validation from your clients. Each 1099 tax form you receive is a sign of a customer who was pleased enough to pay you. And the more 1099s you receive each year, the more booming your business was that calendar year.
Secondly, while it is unusual, some clients may make mistakes. When you notice a disparity between the amount reported and the amount paid, speak up. Erroneous reporting can attract unwarranted audit – or, worse yet, could put you on the hook for taxes you don’t owe. Be proactive when tracking all your income and make sure that it meets the reporting submitted by customers to the penny!
Finally, as we mentioned from the onset, the 1099 form is a necessary tax form for freelancers, and should never be overlooked during the tax season. By keeping good records, you can make your tax filing process much more manageable. All said and done, never let the so-called complex freelance tax processes thwart your efforts in growing your business. All the best, and don’t be afraid to ask for help when necessary.
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