Hi! I’m Meg, and I’m self-employed.
Confession time: I recently did something pretty awful.
I read everything I could find about the 1099 form on the IRS website. I kind of had to because, for me, tax time is a bit trickier than just submitting my standard W-2 forms.
To avoid being penalized, I have to obtain a 1099 form (1099-MISC, in this case) from every client who paid me more than $600 during the previous tax year—that’s a lot of paperwork to keep organized.
If you’re a new freelancer or a business owner thinking about hiring an independent contractor, understanding the ins and outs of 1099 form filing requirements can feel overwhelming.
But never fear, I’ve got the low-down on this type of tax form to help you better understand how and when to file 1099s.
Don’t want to read the whole thing?
Feel free to use the links below to jump to the section you’re interested in reading.
There are actually a few different types of 1099s, but the type most relevant to freelancers and business owners is the Form 1099-MISC–the form the IRS uses to keep track of miscellaneous income that taxpayers have to report as earnings. If you’re a business owner, this is the form you’ll use to record and report payments made to freelancers and independent contractors.
Also frequently referred to as “freelancers,” independent contractors are people you hire to do a particular job or project (think graphic designers, copywriters, photographers, web developers, and event planners). Independent Contractors are not employees. They are professionals you pay an agreed-upon rate for a particular service, and they do not receive a salary or employee benefits.
Late filing fees for 1099s aren’t hefty, but they will apply, even if you’re only a day or two late. Be sure to mark the deadlines on your calendar so you don’t risk a late fee. If you need more time, you can file for an extension using Form 8809, but you must still submit Copy B to your independent contractors by January 31.
The following fees apply for each late 1099 form (that means every 1099 you file for every contractor):
You should send a 1099 to every contractor–this means individuals or unincorporated businesses such as LLCS–to whom you paid $600 or more for services, rent, awards, or other miscellaneous business-related activities during the year. You only need to issue 1099s for business payments to non employees– like the person who decorated your office or the one who designed your new website. You do not need to file a 1099 for the photographer who took your wedding photos–that’s a personal expense, not a business expense.
Here are a few guidelines to help you remember who you need to file a 1099 for:
✔ Do file a 1099 for independent contractors and unincorporated businesses to whom you paid over $600 in a single tax year.
✘ Do not file a 1099 for employees. You’ll report your employees’ wages, tips, and other compensation on a Form W-2. Not sure whether someone is a contractor or an employee? Click here for more info on how to tell the difference.
✘ Do not file a 1099 for Corporations. If the person you paid $600 or more is classified as an s-corp or a c-corp, you won’t need to file a 1099 for them. You’ll be able to tell whether they’re incorporated or not based on the Form W-9 you should have requested they fill out when you hired them.
The easiest way to complete your 1099 forms is to use a payroll service (like ZipBooks!) However, if you’d rather do it yourself, you’ll need to take several steps including gathering the needed information, sending a copy to the independent contractor, sending a copy to the IRS, and submitting Form 1096 if you file a physical copy. Don’t worry, I’ll break down each step for you below.Step 1: Gather the needed information for each 1099. You must have the following things for each contractor, which you should be able to find on their individual W-9:
Step 2: Complete Form 1099-MISC using the information you gathered in Step 1.
Step 3: Submit Copy B to the Contractor no later than January 31 so they can file their own taxes by the deadline.
Step 4: Submit Copy A to the IRS by February 28 if you’re filing by mail, or March 31 if you’re filing electronically. You can check the IRS’ exact deadlines for the filing year you’re working with by reading the “When to File a 1099 Form (Deadlines)” note at the bottom of the form.
Step 5: If you submitted a physical copy of the 1099 to the IRS, you must also submit Form 1096, which tracks every 1099 that you are filing for that particular tax year. The deadline for Form 1096 is the same as the deadline for 1099s.
Step 6: Check whether you need to file your 1099s with your state tax commission. Your CPA will be able to help ensure that you’re compliant with your state’s tax laws.
You have the option of either mailing a physical copy of the 1099 to the IRS or filing electronically, but either way, you’re still required to send a copy to each independent contractor. The way you’ll file your 1099s is slightly different depending on the method you’re using, and there are pros and cons to each.
Copy A–If you choose to file electronically, you will use the IRS Filing a Return Electronically (FIRE) feature. You’ll work with your accountant or a compatible accounting software to actually submit your 1099s to the IRS.
In order to use FIRE, you’ll need a Transmitter Control Code (TCC). To get one, fill out Form 4419 and then mail it or fax it to the IRS. Be sure to submit this form at least 30 days before the 1099 deadline to avoid penalties. After the IRS sends you your TCC, you’ll use it to create a FIRE account.
Copy B–You can send the independent contractor their copy electronically, but first you have to have their consent to do so.
For example, if you’re planning to use a payroll service like Gusto, the contractor should have created an online account with Gusto and filled out a W-9 there. Or, if you’re planning to email the form, you should first send an email to the contractor to get their permission.
The IRS has specific rules for how you must obtain consent to send a 1099 electronically. You can view all of the IRS rules here.
1099-MISC Copy A–If you choose to file physical copies of your 1099s, you’ll need to fill out a physical copy of Form 1099-MISC that you’ll get from the nearest IRS office–you can’t just print one off of the IRS website.
After you complete the form, you’ll mail it back to the IRS by February 28.
1099-MISC Copy B–For the copy you’ll send to the contractor, you can either fill out a physical copy of Form 1099-MISC or print off an electronic version of Copy B from the IRS website. Be sure to send the completed form to the contractor by January 31. You can get additional information about filing physical copies of your 1099s on the IRS website.
Beginning January 1, 2017, the IRS has updated deadlines for filing 1099s. The following deadlines now apply, depending on your 1099 and how you plan to file:
It’s important for freelancers and independent contractors to be aware of all of the 1099 filing guidelines that businesses must adhere to, but there are also a few things you should know about 1099s to make tax season a little less stressful.
If any one client paid you $600 or more during the tax year, it is that client’s responsibility to send you a complete copy of Form 1099-MISC by January 31. If the deadline rolls around and you haven’t received a 1099 from a client and you think you need one, request it as soon as possible so you can meet the filing deadline.
Whether or not you receive a 1099 from every client you worked with during the year, be sure to report all of your earned income on your tax return or risk penalties and a potential audit.
Occasionally, a shady employer will attempt to misclassify their employees as independent contractors in order to save money on things like payroll taxes. This is bad news for you as the misclassified employee because it means the following:
As you can see, being misclassified as an independent contractor when you should be an employee has the potential to be very costly. You should take the following steps if you believe you have been misclassified:
If you were misclassified as an independent contractor and then were fired or laid off, you can file an Unemployment Insurance Claim with the Unemployment Office.
If you were injured on the job while you were misclassified as an independent contractor, you should file a Workers’ Compensation Claim. Visit the U.S. Department of Labor website for a list of state workers’ compensation agencies.
If you have always worked a normal job and received a W-2 from your employer, you may not be aware of 1099 forms. They are a different type of “information return” than a W-2, but no less powerful for the IRS.
An “information return” is a form that is filed not by the taxpayer, but by the entity that paid the taxpayer. It reports to the IRS that the taxpayer received income of some sort, and lets the IRS know that the taxpayer should be including this income on his or her personal tax return, when it is filed. The entity issuing this form will send a copy to the IRS and a copy to you, so that you can report your income properly.
If you don’t report the income on a 1099 form that you received, you may be in for a rude awakening when the IRS contacts you and asks you about it. They will probably also ask for tax payments and possible penalties as well. So it’s best not to ignore them.
There are a lot of different types of 1099 forms, and some are much more common than others. Here we will review the most common ones, and also include a short explanation for the less common ones.
1099-DIV, Interest Income This is a form that is issued by banks and any other institutions that may pay interest on your deposits. Any institution that pays you more than $10 in interest during the year must issue a 1099-INT. This could be interest earned in a checking or savings account from a bank or credit union, a money market account, a brokerage account, certificates of deposit (CDs), and savings bonds issued by the U.S. Treasury.
Accounts that may earn interest but that will not be issued a 1099-INT form include traditional IRAs, and Health and Medical Savings Accounts (HSA, MSA), because those accounts are not subject to taxation. Interest earned in an account held in a foreign country will also not receive a 1099-INT, because that will receive a different form.
1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. If you received a distribution of at least $10 from any retirement source, you’ll get a 1099-R detailing it. You may get multiple 1099-R forms, if you are making withdrawals from multiple sources (a pension, an annuity and an IRA, for example.)
If you do a rollover from one account to another (from a 401(k) to an IRA, for example), you will receive a 1099-R if the money was ever in your possession. If you did the rollover directly from one institution to another, however, you should not get a 1099-R for the transaction.
Some 1099 forms aren’t as popular as others, but in order to be a “complete” 1099 form guide, we included the other less commonly issued 1099 forms. Here they are:
1099-A, Acquisition or Abandonment of Secured Property This form is used when your lender forecloses or repossesses your personal property. You could receive more than one of these forms on the same property, if there was more than one mortgage that was foreclosed.
The reason the IRS is involved in this scenario is because if there was a gain, the IRS wants the tax due on the profit. Even though you didn’t actually sell the property, you may have still realized a gain. So the outstanding loan balance will be deducted from the “selling price” (or the fair market value of the property at the time of the foreclosure) to determine if there was a gain or a loss.
If there was a gain, it must be reported on Schedule D on your income tax return. While it may seem like it is adding insult to injury (first you lose your house, then you have to pay tax on a gain?) you will likely be exempt from paying any tax due to the large exclusion for capital gains on a main residence. However, it still must be reported, even if there will be no tax due.
1099-B, Proceeds From Broker and Barter Exchange Transactions Your broker will issue this form when have bought or sold corporate stock or non-Treasury bonds during the year. The broker will total all of your gains and losses from all of your transactions throughout the year, and the total will be reported on the 1099-B.
The 1099-B will also include all of the details for the transactions: description of investment, purchase date and price, sale date and price, and profit less commissions paid. All of this information will have to be reported on your income tax filing.
1099-C, Cancellation of Debt Income Any lenders who have forgiven debt that you owe to them will issue you a 1099-C, to reflect the amount of the debt that you no longer have to pay. If, for example, you negotiated with your credit card company to pay only 50% of the debt that you owed, the remaining amount is subject to taxation as income. The good news is, you will only get this form if the lender has forgiven over $600 in debt.
This form will also apply if you negotiated on a home for the outstanding loan to be forgiven, or if you negotiated a short-sale on your home. This could result in a significant tax obligation, but you may be able to apply for an exclusion under the Mortgage Forgiveness Debt Relief Act of 2007. If you receive a 1099-C for this type of activity, please consult with a tax expert to be sure you are paying only the tax that you must pay.
1099-G, Certain Government Payments You will receive a 1099-G if you receive over $10 in unemployment compensation; state or local income tax refunds, offsets or credits; reemployment trade adjustment assistance (RTAA) payments; taxable grants; or agricultural payments.
Other types of income paid by a government source, like contest winnings or interest payments, will be included on a different type of 1099 and not on a 1099-G.
1099-LTC, Long-Term Care and Accelerated Death Benefits If you have received Long-Term Care benefits from an insurance policy, the insurance company is required to provide you with the 1099-LTC. This includes both payments made directly to you, or those paid to a third-party (like a long-term care home) on your behalf.
While the amount on this form could be significant ($20,000 or more), it is not necessarily taxable as income. You will deduct your expenses from the benefits in order to determine if there is any tax due.
The form may also be issued if you received accelerated death benefits for a life insurance policy, as a terminally ill patient. This may also be called a “viatical settlement”.
1099-S, Proceeds From Real Estate Transactions If you sell real estate, it doesn’t matter if you have a gain or a loss – you will get a 1099-S from the closing company. There are only a couple of situations where this transaction is not reportable:
All other sales are likely reportable, and will apply to either your Investment Income (personal use real estate) or your Business Income (rental or investment property) when you file.
You can save hours of time filling out 1099s by taking advantage of ZipBooks’ payroll and online bookkeeping services. Find out more about ZipBooks’ hands-off bookkeeping solutions today!