If you are a self-employed contractor or freelancer, and you earned more than $600 from a client in the past year, you’ll be receiving a 1099 tax form from them this tax season. Likewise, if you own a business and paid an independent contractor more than $600 in the past year, you’ll have to send them a 1099 form, and report it to the IRS. These forms aren’t anyone’s favorite thing to receive, but with more and more workers turning to freelance work, they are increasingly common.
There are many exceptions to the $600 threshold, so it’s important that you don’t rely on that number as your rule of thumb. For example, authors who self-publish through Amazon will receive a 1099 from Amazon if they sell more than $10 worth of books in a given year. If you have a savings account that earns interest, you may even receive a 1099 form for that interest, which you will have to pay taxes on. It’s easy to see why no one really likes these. In order to be ready for this year’s 1099, here are five things you need to know about your 1099 form.
1. You must report every 1099, even if there is a dispute.
The reason that the IRS loves the 1099 so much is that it allows them to keep tabs on taxpayers much better than the standard W-2s. If you aren’t receiving a regular wage from an employer because you are freelancing, then it would be easy for that income to fall through the cracks. The IRS requires that every 1099 form be sent to both the payee and the IRS—and their system will immediately log the 1099 and match it to your social security number.
Therefore, if you disagree with what was reported in a 1099 and are attempting to dispute the report, the IRS will still show that you have that 1099 to report. And not reporting it can quickly lead to an audit or a letter telling you to pay what’s owed on that 1099. The only thing you can do, if you haven’t successfully disputed the 1099 before the tax deadline, is to explain the dispute on your tax return by putting a “0” on the extra income line with a note that describes the erroneous report. This may not be a perfect solution, but it at least ensures that you have acknowledged the report.
If you do receive a 1099 with an error, don’t panic right away. Companies have an extra 30 days to send their report to the IRS beyond their deadline to send to you. That’s a full month for you to dispute the 1099 and have it changed or dismissed before it ever hits the IRS’ system. This is a very good reason why you should be keeping immaculate records that you can easily compare your 1099 with when you receive it.
2. Deductions are even more murky with 1099s.
When you are attempting to figure out what can and can’t be deducted as business expenses as a business owner, there are a ton of exceptions and special circumstances. Things get even more complicated with 1099s. Anything paid towards housing can’t be deducted, even if you work out of your home office. Expenses that you were reimbursed for, such as mileage, also can’t be deducted. It’s best to contact your CPA and find out what specific items you can deduct before filing with a 1099.
3. Keep an eye out for that 1099 all the time.
The official deadline for sending a 1099 to a contractor or freelancer is January 31, though in the past, the IRS has extended that deadline to February 16. However, just because that’s the deadline doesn’t mean that the employer will comply. If your work with an employer is a one-time contract, they may send your 1099 with the final payment, rather than wait till the following January to do so. You will need to file this 1099 away and remember it again when tax season rolls around.
If an employer is late in sending out a 1099, they will have to pay a fine. This may mean that you have to file your taxes without the form, and then amend them later when you receive the form. This can change how much you owe, but a CPA should be able to help you file with an estimated amount to ensure that you don’t get slammed with a big debt after you amend your taxes.
4. Don’t forget to file the 1099 on your state taxes.
If you live in a state with income taxes, you’ll need to report the 1099 on this filing as well. Your state will receive the same information as the IRS, so their computer system will also connect you to the income. If you don’t receive a 1099, it’s best to assume that the IRS and the state did receive the information, and file your taxes based on the income you received anyway. They will let you know if your reporting was incorrect based on what information they received. This is another very important reason you should keep excellent records yourself.
However, many tax professionals will advise that if you don’t receive a 1099, and you know the income amount that would have been reported yourself, it’s best to not ask the company to send you a new one. The risk that they could report the income to the IRS twice, thus making it look like you earned double what you did, is high and usually not worth the piece of paper telling you what you already know thanks to your own bookkeeping.
5. Electronic payments are not exempt.
There is a lot of misinformation around about electronic payments through PayPal, credit cards, or other digital payment services. In some cases, employers have been led to believe that they do not have to send out a 1099 for these payments at all, which may have led freelancers or contractors to believe that they do not have to report this income.
That is incorrect. The most current information states that in a very specific situation, in which the employer paid the contractor more than $20,000 over more than 200 payments in a single year, then the electronic payment service will instead issue the 1099. However, if the payments did not fall into that specific situation, the employer must still issue the 1099. And in either case, the freelancer or contractor must of course report any income over $600 for the year.
Contact Your CPA for More Information
As the 1099s begin to come in for tax season, it’s best to seek out the advice of a CPA if you aren’t comfortable filing yourself. You will save more money by understanding what you can deduct, and avoiding costly filing mistakes, by partnering with a professional.