If you are one among the 50 million+ independent contractors or freelancers then there you sure must be aware of the impending arrival of 1099s and W-2s from your clients or employers this month. While no one is a fan of these tax forms, they can be quite complex right from on the onset and if you are new to this gig economy and are already feeling the heat of the 1099s this blog is for you. Here we give you the required information about the 1099 to raise your awareness before you go out to file them. So read on:
What is 1099?
1099 is an information form that is issued by the IRS to help the taxpayers report any non-salary income. This facilitates the IRS to collect appropriate taxes on the total income.
The business entity or person that pays you the additional non-salary income is responsible for issuing 1099 form by the specified date every year. For example, if you are working as an independent contractor or as a freelancer, you will receive a specific type of 1099 from your clients that have paid you more than $600 in a particular year. While this number is just a threshold value, there are many more intricate details and even exceptions based on the type of income a taxpayer receives.
What type of income is reported on 1099?
It has to remember that the 1099s are for any type of non-salary income. In addition to income from freelance and contractor work, other non-salary income from lawsuit and divorce settlements, stock dividends, real estate sales, royalties, investment returns periodic interest payments, lottery winnings and other awards or prizes, inheritance and even debt cancelled by the creditors has to filed under 1099.
Individual taxpayers can get these 1099 forms electronically or via mail during the January from their clients or non-salary income sources like financial institutions, creditors, brokerage or other entities.
Most common types of 1099s & their Intended Purposes:
Given there can be multiple types of income for the payers there are as many variants of the 1099s that can safely categorise them for reporting. The form 1099 is considered as “information return” by IRS and there are many variants of these ‘information returns’ forms, here are the most common ones and their purposes:
- 1099-NEC
1099-NEC is the variants of 1099 which informs the IRS about the non-salary payments of $600 or more made by a business to the self-employed resource or independent contractors. The businesses responsible for issuing this 1099-NEC only if they have paid more than the threshold i.e. $600 and anything less, they need not do it. Every 1099-NEC form has two copies – A & B, A must be submitted to the IRS before January 31 and B must be sent to the contractors.
An independent contractor must keep in mind that he/she must still need to report all their income to IRS (no threshold here).
- 1099-INT & 1099-DIV
1099-INT is a variant that can be received by a taxpayer from the bank to inform about the amount earned in the form of periodic interests in a particular year. Even though the interest could be minimal, it is taxable and hence taxpayer has to report the same interest that is on the 1099-INT while filing his income tax returns.
Similarly, 1099-DIV is sent by the brokerage firm to report on the dividends a taxpayer has received on the investments. Gains and losses made by an individual from selling assets are different and they must file separately.
- 1099-G & 1099-R, 1099-B & 1099-C
The government shall send the 1099-G form to the taxpayer to report the money received through taxable unemployment benefits. They must be reported in the income taxes and in case they have claimed deductions in the previous tax year, the refund must be reported as an income too.
As for 1099-R, it is sent by the brokerage form with the details of the withdrawals from the retirement account – received money from the annuity, profit-sharing plan, or pension plan – 1099-R is here to report. Similarly, 1099-B reports income received from barter exchanges, and brokerage transactions, 1099-C reports the cancelled debt from creditors or even credit card companies.
- 1099-K:
If a business exceeds more than $20,000 in gross receipts or more than 200 payment transactions, the payment settlement companies file a 1099-K form that reports your total income and send a copy to the business. You can find these 1099-K forms in the respective sections of PayPal, Stripe, Shopify, Amazon payments and other payment settlement companies.
- 1099- MISC
Previously 1099-MISC is used to be issued by the businesses for all the miscellaneous payment which included the payments made to the self-employed and independent contractors. With 1099-NEC is being used to report the payments to independent contractors, 1099-MISC is still around for miscellaneous payments. Businesses can issue and file the 1099-MISC for payments made in the form of rents, medical payments, crop insurance process, prizes, awards, payment to the attorney, cash paid to individual, estate or partner from nation principal contract, royalties and more. The 1099-MISC is due March 31 if it is electronically filed, March 1 if manually filed.
In addition to the above there another form of 1099s:1099-LTC associated with long term car insurance,1099-OID (financial instruments),1099-PATR (patronage dividends),1099-S (real estate sales),1099-SA (healthy savings account) and more which have to be taken account while filing your income taxes.
If you are a business that is dependent on a wide variety of independent contractors you are in for bucket loads of work amidst the ever-changing tax rules and regulations which can attract mistakes resulting in penalties too. While filing the extensive collection of forms with all the necessary information is a tiring job in itself, performing them within respective deadlines which can vary dependent on the type form, is a herculean task. And this is where expert back-office accounting firms like Outsourced Bookkeeping comes into the picture. In addition to being a remote accounting firm that offers complete accounting solutions for businesses, we have also developed a complete outsourcing solution for 1099 reporting that perfectly accomplishes all your reporting needs in compliance with tax rules and regulations. If you are a small and medium business looking for outsourcing 1099 reporting or tax preparation services, you can contact us here: www.outsourcedbookeping.com