Tax season is upon us. It’s time to gather mountains of paperwork in hopes of making the April deadline.
If you’re filing your taxes yourself, take extra precaution to make sure you get the maximum refund you’re due and avoid owing more than your fair share.
Use this guide to learn how to file a 1099 if you’re self-employed.
What’s a 1099?
Most IRS forms are identified by a special number. The number 1099 refers to a document used to mark income that’s not earned through employment.
Any contract or freelance work you did last year would be listed on a 1099. Any companies you perform work for should provide you with a 1099 on or before January 31st.
You’ll know if you worked as an independent contractor because payers require all contractors to complete a W9. The W9 matches your social security number with the payers EIN.
This matching is how the IRS ensures you are both reporting the same income information.
The 1099 serves reference document helps you summarize your income for the year. If you own a business, your company receives a 1099, too.
Even if you are technically a resident of another country, you need to report your income. Instead of a 1099, request a W8BEN from the payer to report income earned as a foreigner.
Every entity and individual that earns money must report income to the IRS each year even if you already receive a W-2. There are around 20 different kinds of 1099s you can receive.
Take a look at this list of the most common 1099s.
1099-A
Did you short sell your home last year? If so, you’ll receive a 1099-A for the canceled debt.
Even though you didn’t technically make money from the transaction, the canceled debt is considered income.
1099-B
This 1099 is received when you sell securities or barter with someone using a website service. It doesn’t apply if you barter with someone directly.
1099-C
Similar to a short sale on your house, when credit card company accepts less than you owe on your account balance the forgiven debt is considered income. The 1099-C reveals just how much taxable income comes from the transaction.
1099-NEC
Starting in 2020, companies will have to start using this 1099 for people who did work for them but weren’t full-time employees. If you’re a contractor or self-employed you’ll start receiving a 1099-NEC.
1099-DIV
If you’re lucky enough to receive dividends from one of your investments, you receive a 1099-DIV. These forms are only issues if dividends are more than $10 for the year.
1099-Q
Saving for college using a 529 plan has its perks. The money earned on the investment is considered income but usually isn’t considered taxable.
What Happens if You Don’t Receive all 1099s?
Mistakes happen. Mail sometimes goes missing.
If you don’t receive all your 1099s, contact your employer to check the status. Some payroll companies give employees and contractors access to these documents online.
Assume that all companies who pay you will report your income to the IRS even if you don’t have any record. Even if the amount is small, it’s necessary to account for every penny.
Getting an accurate amount for your income is important in helping you avoid overpaying. If you underpay, the IRS will send you a bill for the remaining balance.
You won’t always get the bill right away. If the IRS doesn’t catch it till later, it could take years to arrive.
What if a 1099 Includes Mistakes?
Open your 1099 immediately when it arrives in the mail. Many companies send out 1099s close to the filing deadline leaving you with little time to correct mistakes.
Contact the payer right away if you find mistakes. You want to give them enough time to resubmit 1099 forms to the IRS with the corrected amount.
The payer will have the option to send in a corrected 1099 if you don’t catch the mistake until after the deadline. If it’s a larger company with thousands of employees, getting them to prioritize your issue might be hard to do.
How to File a 1099 Before the Tax Deadline
Gather all your 1099s for the year before preparing your tax return. Total all income from 1099s and use this number to report nonemployment income on your 1040.
Use a Schedule C and Schedule SE to report your earnings on your 1040. Schedule SE is required only if your net earnings are more than $600 for the full tax year.
Use the Schedule SE to estimate medicare and social security taxes due for the year. It’s possible you might need to make an estimated tax payment.
If you are doing taxes on your own using tax software, like http://www.track1099.com, you will be prompted to enter the amount of your gross income on form Schedule C. This amount will be taxed as income tax in addition to the self-employment taxes taken out.
If you use a tax professional to file your returns, hand over your 1099s with your other income and expense documents for the year. A Schedule C is helpful because it allows you to enter in all of the expenses paid for the year.
The amount of your expenses reduces your business income. Most taxpayers want reduced income on a tax return because your taxes are calculated based on how much money you make.
The higher your income, the higher your tax payment. It’s important to take advantage of deductions that apply to business.
A few industries, like real estate investing, have their own special rules on what they can deduct.
The Self Employment Burden
One of the big disadvantages of a 1099 is that there’s no withholding. You end up getting double-taxed because the employer doesn’t carry the tax burden for you as they do for their employees.
Now that you understand how to file a 1099 you can make the necessary adjustments to your hourly rate to account for this tax obligation. When people are thinking of venturing out on their own, the decision to carry more tax liability if far from their minds.
But there are opportunities to deduct your business expenses and other indirect costs to offset the taxes you owe. Tax rules change every year.
Consult with a tax professional to help you take advantage of all the deductions you’re entitled to. For more information, please check our blog for updates.