Receiving a 1099 is becoming more and more common with the rise in small businesses, side hustles, and the desire for a second stream of income. With the additional income comes a different tax filing process. If you receive a 1099, it’s because you earned a certain amount of income from a non-employer. Like most income, 1099 income is taxable. Here’s a breakdown of the basics of the IRS 1099 form.
What is a 1099?
IRS Form 1099 is actually a collection of tax forms, and not just one single form. If you receive a 1099 form, it means that the sender paid you a certain amount of money, usually at least $600, in the previous year. These funds could be from income you received as an independent contractor, rental income, dividend payouts, and more. These forms serve as a record of payments made to individuals or entities during the tax year. They are used by businesses, banks, and other institutions to inform both the recipient and the IRS of income that may be subject to taxation.
Unlike W-2 forms, which report wages and withhold payroll taxes, 1099s generally do not have federal or state taxes withheld. Recipients are responsible for calculating and paying any taxes owed on this income, often through estimated tax payments. For example, a freelance graphic designer completes a project for a company and is paid $2,000. They will likely receive a 1099-NEC reporting that payment. The company issuing the form does not withhold taxes. The freelancer must account for self-employment taxes and income taxes when filing their return.
Who receives a 1099?
Many individuals and businesses receive 1099 forms if they have earned qualifying income. Independent contractors and freelancers are among the most common recipients. Among many other scenarios, you’ll likely receive a 1099 if you:
- Are a freelancer or independent contractor
- Received $600 or more for rent, prizes, awards, and other types of payment
- Received $10 or more in royalties or broker payments
- Received $20,000 or more via third-party apps like Venmo or PayPal
- Received unemployment compensation
- Earned interest, dividends, or capital gains from banks, brokerage firms, and investment companies
What are the most common types of 1099s?
We’ll break down each type of 1099 in our next post, but here are the most common ones:
- 1099-DIV: Dividends and Distributions
- 1099-G: Certain Government Payments
- 1099-INT: Interest Income
- 1099-K: Payment Card and Third-Party Network Transactions
- 1099-MISC: Miscellaneous Income
- 1099-NEC: Nonemployee Compensation
- 1099-R: Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
When Should You Receive a 1099?
Issuers are required to send 1099 forms by January 31 each year. If you have not received a 1099 by early February but expect one, you should follow up with the issuer. On the other hand, if you receive a 1099 that’s incorrect, you should contact the payer to request a corrected form. If the issue is not resolved, you can still report the correct income on your tax return and attach an explanation if necessary.
What if I don’t receive a 1099 for income I earned?
Even if you do not receive a 1099, you are still responsible for reporting all taxable income to the IRS. The absence of a form does not exempt you from paying taxes on that income. For example, if a freelancer earns $500 from a single client, the client may not issue a 1099-NEC because they did not meet the $600 threshold. However, the freelancer must still report the income on their tax return.
To avoid underreporting, individuals should keep detailed records of all payments received throughout the year. Bank statements, invoices, and payment app records can serve as proof of income when preparing a tax return. Failing to report income, even if no 1099 was received, can lead to penalties and potential IRS audits. The IRS receives copies of 1099s from businesses and financial institutions, so any discrepancies between reported income and IRS records can trigger scrutiny.
It’s critical to wait for all tax forms before filing your tax return. If you are still waiting for a 1099 after the deadline and the tax deadline is approaching, reach out to the payer responsible for sending it and request a copy be sent to you. Be sure to give yourself enough time to request and receive the 1099 copy to avoid submitting a late tax return.
How to File Taxes with a 1099
When filing a tax return, 1099 income must be reported in the appropriate section. Freelancers and independent contractors report their earnings on Schedule C, where they can also deduct business expenses. Investors report capital gains and losses on Schedule D, while interest and dividends are recorded on Schedule B. Since 1099 income often does not have taxes withheld, recipients may need to make estimated tax payments throughout the year to avoid penalties. These payments are made quarterly to the IRS and help cover income taxes and self-employment taxes.
It’s important to note that the amounts shown on 1099s represent gross income before expenses. If you’re self-employed, you can deduct legitimate business expenses on Schedule C, which reduces your taxable income. Expenses can include supplies, software, marketing, and travel related to your work. For example, if your 1099-NEC shows $10,000 of income, but you spent $2,000 on necessary business expenses, you only pay taxes on $8,000. Investors use Schedule D to report capital gains and losses from amounts shown on 1099-DIV or 1099-B, while interest and dividends are reported on Schedule B.
Common Mistakes to Avoid with 1099s
The most common mistake to avoid with 1099s is to omit the income from your tax return or report it late. If you discover an error after filing, you should amend your return as soon as possible using Form 1040-X. For example, failing to report a $5,000 1099 could result in an underpayment penalty, which increases the longer the tax remains unpaid. Filing an amended return promptly can help minimize additional charges.
Another common error is overlooking 1099 forms that arrive late or get misplaced. Since the IRS receives copies of all 1099s issued to you, failing to include reported income can trigger an audit. Always review your tax documents thoroughly and cross-reference them with your records. Finally, misunderstanding the difference between gross and net income can be a common issue. Only deduct expenses that are ordinary and necessary for your business and keep receipts and documentation in case of an audit.
Tax Help for Those Who Receive Form 1099
Overall, understanding the 1099 form is important for anyone who receives income from sources other than an employer. By properly reporting all income received on the form, individuals can avoid penalties and ensure that they pay the correct amount of taxes on their income. Optima Tax Relief is the nation’s leading tax resolution firm with over $3 billion in resolved tax liabilities.
If You Need Tax Help, Contact Us Today for a Free Consultation