You’ll get many forms when it’s tax time, but one you might not be familiar with is the 1099. Last year more people went off and did their own thing either to make more money or to replace the job they lost, so you might have received a 1099 and don’t know what to do with it.
This guide will show you just what you should do with 1099 and how it affects your taxes.
What is a 1099?
If you earned money from someone other than an employer, they must record the payments on a 1099. The 1099 form goes to you and the IRS so the IRS has a record of the money you earned, which means you must report it on your taxes too.
Who Gets a 1099?
Typically, anyone that earns $600 or more from one company gets a 1099 if they aren’t an employee. You may receive one even if you earned less than $600 in a non-employment situation, though as it depends on the reason.
The most common people to get 1099s are freelancers and consultants – anyone who provides services for a company without working as an employee.
Are you an Employee if you get a 1099?
You are not an employee of the company if you get a 1099. You receive the form because the company paid you but did not hire you as an employee.
This means you don’t get any company benefits and you’re responsible for paying your own taxes. The company that paid you doesn’t cover the employment side of taxes like they would if you worked for them.
The Types of 1099s
The most common type of 1099 is the 1099-NEC. This is what most companies give freelancers or consultants who aren’t an employee.
Other 1099s include the following.
1099-DIV
This is a common form if you earned dividends on an investment. Any 1099-DIV, you receive you must report on your taxes.
1099-INT
A 1099-INT reports any interest you earned on your bank accounts above $10. This includes all interest from banks or any financial institution.
1099-G
If you received a refund on last year’s taxes, you’ll receive a 1099-G that you must claim on your tax returns.
1099-R
You’ll receive a 1099-R for any retirement distributions you took from your 401K or IRA. You’ll receive this form if you took an early distribution, regular distribution, or even if you took out a loan against your retirement funds if it’s considered a distribution.
These are the most common 1099 forms you’ll see; other less common forms include:
- 1099-A – If you had a mortgage that your lender canceled all or part of, it will be reported on 1099-A.
- 1099-C – If you had credit card debt that your creditor canceled because you couldn’t pay it, they will report it on 1099-C.
- 1099-LTC – If you received funds from your long-term care insurance, it will get reported on 1099-LTC.
- 1099-SA – If you used money from your Health Savings Account, it will be reported on a 1099-SA.
How to File your Taxes with a 1099
Filing your taxes with a 1099 isn’t much different than filing with a W-2, with one big exception.
You can take deductions on the income if you ran a business or worked as a freelancer. The deductions you take must be for business purposes and cannot have any personal uses included.
The IRS claims the deductions must be for costs that are usual and customary for your business and the expense must be necessary. In other words, without it, you wouldn’t have been able to run your business.
The deductions will reduce your net income and therefore your tax liability.
Understanding Self-Employment Taxes
If you received a 1099-NEC, you’re responsible for not only your income taxes, but the Medicare and Social Security taxes known as FICA that employers usually take care of for you.
You only pay self-employment taxes on the net income (after deductions) and any income reported on a 1099-DIV or 1099-INT, for example, aren’t subject to self-employment taxes.
The self-employment tax is 15.3% of your net income. If you earned $10,000 after deductions, you’d owe $1,530 in self-employment taxes.
There’s another catch, though.
You must send in estimated tax payments throughout the year if you receive a 1099-NEC. Because we live in a pay-as-you go society, you must pay your taxes as you go. Since you don’t get paid by an employer who handles the taxes for you, it’s your responsibility to make estimated tax payments each quarter.
The amount you must send is an estimate based on your earnings. You can use software like TurboTax to help you or consult with your tax professional. If you pay enough for your taxes, you won’t be subject to late payment penalties even if your tax liability ends up being slightly higher than what you paid.
Final Thoughts
The 1099 form is more common today than ever before. You might even receive a 1099-MISC which is a catch-all for any income that doesn’t fall within the categories for the other 1099s.
If you receive a 1099 form, you must report the income. The IRS knows about the income and won’t let you get away without reporting it. If you get one for business income, make sure you take any allowable deductions for expenses you incurred to run your business, even if it’s a side gig. This will decrease your tax liability and leave you with more money in your pocket.
If you aren’t sure what to do with your 1099 or why you received one, consult with a tax professional to find out your next steps. A 1099 is just as important as a W-2 and must be reported on your tax returns.