Doing taxes can be tiring but it is important to file taxes on time. And when we talk about filing taxes as an independent or freelancer contractor, one focused term which pops in our mind is Form 1099. Earlier if you were freelanced or the business that gets hired on a contract basis, you will receive the 1099-MISC. But it has changed now. Now the IRS has launched a new form 1099 NEC.
You would definitely dislike getting Form 1099 as a taxpayer. You probably dread sending them out if you’re in company. In fact, except for the IRS, nobody really enjoys 1099 forms. They’re popular with the IRS because they allow its software to keep track of everyday taxpayers even though it only audits about 1% of all individual tax returns.
What is an IRS 1099 form?
A 1099 form is evidence that was issued by someone other than your boss. The payer finishes the 1099 form and provides you and the IRS copies. It is basically for the independent contractor. It is your accountability to file a Form 1099-NEC with the IRS and send a copy to the contractor if your company hired a contractor and billed them more than $600 in a year.
What is a 1099 form used for?
If you get a lot of money in and out through the year then it is definitely for you. To find out how much money you earned over the year and what kind of tax it was, you use the IRS Form 1099s. Depending on what kind of money that was, you’ll record it in various ways on your tax return.
Things You Should Know About 1099s
Do you aware that all 1099s and W-2 reports (the employer’s wage-reporting forms) are balanced against your Form 1040 or other tax forms by the IRS. If they don’t fit, it sends a CP2000 note to taxpayers, telling them that they owe more money.
To avoid such things, there are many things you need to know about the 1099 forms.
- Who Should Get a Form 1099 – The very first thing you need to know about Form 1099 is that it is for the people who receive non-employment income. Such as if you work as an independent contractor then it will come under the 1099 criteria. Businesses must usually submit the forms to any payee (other than a company) who earns at least $600 in a calendar year. That’s just the underlying threshold law. There are several exceptions to this law. That’s why, for any bank account you have, you probably get a 1099 form, even though you got just $10 in interest income.
- Types of 1099s Forms – You must be aware of the type of 1099s forms. There are various kinds of 1099s forms which we are going to discuss.
1099-A – If your mortgage lender canceled any or all of your mortgage, or you were interested in a brief sale of your house, you could obtain a Form 1099-A. Actually, in the sights of the IRS, forgiven debt is revenue, and it’s normally taxable.
1099-B – Form 1099-B records revenue from the selling of a range of shares, as well as certain forms of exchange of goods performed by internet bartering exchanges. In that case, with the income you got, the trade might come under 1099. If you exchange goods with anyone directly, 1099 isn’t normally needed, however, you will have to disclose the revenue.
1099-C – You are not completely off the hook if you have convinced a credit card provider or other lenders to pay your debt for less than you owe. It is probable that the sum the lender repents is taxable revenue, and the 1099-C reveals everything.
1099-CAP – If you own shares in a company that has been purchased or has undergone a significant change in the capital structure and you have assets, securities, or other property as a result, you may earn a 1099-CAP.
1099-DIV – The 1099-DIV is one of the most traditional types of this sort, and it lists dividends you got. It does not provide distributions at the credit union for the share portfolio. The importance is regarded by the IRS, so they appear on another 1099.
1099-G – You could get one of these if you got money from the state, local, or federal government, such as a tax rebate, credit, or substitute. You may even get a 1099-G going your way if you were on unemployment over the year.
1099-INT – A 1099-INT is given if you paid more than $10 in profit from a bank, investment, or other brokerage firms.
1099- LTC – The insurer would usually file a Form 1099-LTC if the long-term care policy has paid out premiums over the year. If you have accepted money from a term life policy’s deferred survivor benefits, they are also specified on this form.
1099- MISC – It is a catch-all for income that, while it has certain clear meanings, does not fall into other 1099 divisions. The profits from competitions and certificates come under this category.
1099-OID – If you acquired shares, notes, or other economic instruments at a discount to the face value or higher costs at maturity, you might collect Form 1099-OID. The instrument must usually have a lifespan of more than one year.
1099-PATR – Expect to collect Form 1099-PATR in the mail if you are a member of a co-op who received at least $10 in sponsorship dividends.
1099-R – You will receive a 1099-R if you have received distributions from a pension, retirement account, revenue scheme, IRA, or annuity. If you have taken a loan from your retirement account, you will have to consider it as a distribution, which means that it will also be on this form, as well as life insurance plans lifetime and complete disability benefits.
1099-S – Anyone liable for processing a real estate sale or transaction provides you with this statement, disclosing the profits. Know that the profits from the selling of your house or other real assets aren’t always taxable.
1099-SA – If you take any withdrawals from your health savings plan, Archer clinical savings account, or Health Insurance, you’ll get this form. Know that whether you use the HSA or Archer dividends to pay for eligible medical costs, they are usually tax-free. So again, a 1099-SA for certain people is clearly verification that the cash entered the account and transferred to you.
- What If You Don’t Get All Your 1099s – Now most people think that if they didn’t receive any 1099 then it is not necessary to pay dues which is not the right approach. Remember you are supposed to pay your taxes even if you don’t get any form. It might get delayed but the IRC won’t forget it.
- Stay on Top of a New Location– Make sure that they have your right address. If not, update your address immediately.
- Report Mistakes Instantly– If you find out any mistakes in the IRS Form then report them immediately. The time gap suggests that you will have the ability to correct apparent faults, so don’t just throw 1099s in a pile, open them immediately.
- Don’t Neglect Form 1099 – Noone ever enjoys a tax audit. But one thing is certain: if you refuse to declare $500 in bank interest, the IRS will give you a computer-generated message warning you that you owe the tax on that interest. Simply pay it if it is right.
- Don’t Overlook State Taxes – Many states have federal taxes, where all the same details as the IRS does can be collected. So if you skipped a form 1099 on your tax form, be mindful that it will definitely come back with your state too.
Difference Between 1099 NEC and 1099 MISC
Basically, the 1099 NEC is used to notify the free contractors. On the other hand, the 1099-MISC form is also in use; it’s now used to record various and sundry revenue including rent or fees to an attorney. Though 1099-MISC is still in operation, the updated 1099-NEC type will record contractor payments made in 2020 and beyond. For 1099-NEC, the due date shall be January 31 of the year after the tax year in effect. The due date will be moved to the next trading day if January 31 does not come on a business day. The 1099-MISC is due on 1 March if submitted on paper, and on 31 March if submitted electronically. The due date is transferred towards the next business day if these days don’t land on a working day.
There you have it! This is our take on why you need form 1099. We know understanding it can be quite complex but you need to stay on top of everything if you’re working as an independent contractor. Filing Form 1099-NEC is the responsibility of the payer. Please be sure to reach out to your Accountant or Lawyer for tax recommendations and/or legal advice.