Back in 1789, Benjamin Franklin wrote in a letter that nothing in the world is certain -- "except death and taxes."
We think that's a bit of a grim outlook on the world, but the founding father isn't wrong. If you work for or operate a business in the United States in order to make money, at the end of the year, you have to start filling out and filing tax forms to pay your taxes.
If you're a business owner who works with independent contractors, or if you're self-employed as a contractor or freelancer, you're going to need to understand the 1099 tax form, which reports on income paid to non-employees. Keep reading to learn more about the purpose Form 1099s serve, and how to use them correctly to file and pay your taxes.
What's a 1099 tax form?
A 1099 tax form is an Internal Revenue Service (IRS) document that reports the various incomes independent contractors or self-employed individuals receive over the course of the previous year other than a salary paid by their employer. The person or business who pays them is responsible for reporting payments and remitting a 1099 form to the individual by January 31st of the following year.
There are a variety of different 1099 tax forms, with the term referring to any tax document that reports on an individual's income other than that paid by their employer in the form of a regular salary. This income is reported on in W-2 form at the beginning of the following year.
The different types of 1099 tax forms can include:
Form 1099-MISC: Independent Contractor Income
If you're an independent contractor, freelancer, or self-employed, you will receive a Form 1099-MISC from every business or individual who paid you more than $600 in the previous year.
Form 1099-DIV: Interest and Dividends
If you receive interest or dividends on stock investments or mutual funds, you will receive a Form 1099-MISC that reports on this income. This form is independent of the form you receive from making or losing money by buying or selling stocks, which is a Form 1099-B.
Form 1099-G: Government Payouts
If you receive payments from the state or federal government over the course of the year, usually in the form of unemployment checks or tax refunds, you will receive a Form 1099-G.
Form 1099-C: Debt Cancellation
If a creditor cancels a portion of your debt that you no longer owe, you will receive a Form 1099-C that reports on that amount as taxable income.
Form 1099-R: Retirement Account Withdrawals
If you withdraw money from your retirement account prior to officially retiring, that is considered taxable income, and you will receive a Form 1099-R will show the amount of the withdrawal that is taxable.
Among the most common recipients of the Form 1099 are independent contractors or freelancers. With more than 57 million Americans who reported that they freelanced in 2017, including 50% of millennials, it's a growing employment trend. In fact, trends estimate that the majority of the American workforce will be freelancing by 2027. So before we continue, let's make sure we're all on the same page about the difference between employees -- whose income is reported using Form W-2s -- and independent contractors, whose income is reported using Form 1099s.
Employees vs. Independent Contractors
The main difference between employees and independent contractors is in the way their income is paid out by a business. Businesses hire employees, pay them a regular salary, and withhold income tax, Social Security, and Medicare from the payments. Businesses pay independent contractors on a contract-by-contract basis and do not withhold taxes from the payments.
When a business hires an employee, they typically build a contract that establishes salary, benefits, vacation time, and if the employment status is at-will or contract employment. When a business hires an independent contractor, contracts are typically shorter-term and project-based that only establish timelines.
Next, let's dig into how businesses and individuals should fill out and use 1099 forms.
How to Fill Out a 1099 Form
Businesses owners must submit a Form 1099-MISC at the end of every year for every independent contractor they made payments of more than $600 to. When you discuss a contract with an independent contractor or freelancer, if you know you will pay them $600 or more over the course of the year, make them fill out a Form W-9 so you have access to their Taxpayer Identification Number (TIN) so you can fill out and remit them a Form 1099 at the end of the year for their tax purposes and for your business'. Then, you'll have the information needed to fill out a Form 1099.
1. Order Form 1099s.
You need to order specific Form 1099s from the IRS that are readable and scannable. You can order them online or by phone using the information on the IRS website.
2. Fill out Form 1099s with tax information of the contractor and your business.
Using the information from the Form W-9 the contractor originally filled out and your business' own tax information, fill out the Form 1099 with the contact information and TIN for both the contractor and your business, along with the total amount you paid the contractor in Box 7, labeled "Non-employee compensation."
3. File forms with each independent contractor and the IRS.
Send Copy B of the Form 1099 to the contractor no later than January 31st. Next, file Copy A of the Form 1099 with the IRS no later than March 31st. Finally, keep Copy C of the Form 1099 for your records. Repeat this process for every independent contractor you worked with over the course of the year. If you're not sure which people and businesses you work with qualify as independent contractors, you can consult this list of guidelines for figuring out how many you should fill out before the deadline.
Now you know how Form 1099s are used to pay and tax independent contractors and freelancers. To learn more, read about how to fill out a W-4 form next.
This article does not constitute legal advice. The steps required to fill out a Form 1099 differ for every person, so you should seek your own legal advice and financial counsel to ensure you follow the correct process.
Originally published Dec 28, 2018 8:30:00 AM, updated September 05 2019