What is a 1099?
What Freelancers & Business Owners Should Know About Earning Other Income or Paying Non-Employees
If you’ve ever done any freelance work, or if you run a small business that hires freelancers, you’re familiar with the 1099 form. But if you’re new to contract work or hiring freelancers, you will need to learn more about what a 1099 is and what it means for you. Let me break it down:
What are 1099’s?
A 1099 is an IRS form that identifies any non-employee income received within a year. This could be income from providing services, interest, dividends, rent, retirement income, etc. Think of it as equivalent to a W-2 for freelancers. The goal of this form is to report income earned to the IRS.
For contractors and business owners, it’s important to pay particular attention to box 3 on the 1099: Other Income and box 4: Federal Income Tax Withheld. Hint: Box 4 will usually be empty unless you (a contractor or freelancer) ask the business owner to withhold tax.
The “Form 1099-MISC” is a pretty straightforward IRS form, but it has a weird quirk. If you are receiving a 1099, all you have to do is report the income displayed on the 1099 you received on your tax return. If you are sending a contractor or freelancer a 1099, you’ll be sending the 1099 to the IRS (and in some cases your state). Yes - this form goes both ways!
There are different types of 1099’s - the type of 1099 you receive depends on why you are receiving one in the first place. View the most common types of 1099’s here.
Receiving a 1099
Who receives a 1099?
Short Answer: Anyone who earns at least $600 in other income (income received outside of regular employment) or at least $10 in royalties will receive a 1099. So, if you did any freelance work and received $600 or more, you should expect to receive a 1099 in the mail.
Longer, more IRS-y language Answer: If you earned at least $600 in the following according to the IRS, you’ll receive a 1099. “...rents, prizes, rewards, other income, income from services or goods, medical or health care payments, crop insurance proceeds, payments to an attorney, fishing boat proceeds, cash paid from a notional principal contract to an individual, partnership, or estate, cash paid for fish, or at least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest, and made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.”
What do I do with a 1099 if I receive one?
You are supposed to report the amount you earned from the 1099 on your tax return when you come to the “Other Income” section: Schedule-C if you’re a freelancer. You should be prompted by your tax software to insert your respective 1099(s), or you’ll give all of your 1099(s) to your Accountant or Tax Preparer.
Note: You may be tempted not to report income from a 1099 - maybe you only got one, or it was just over $600 - but because business owners also send their 1099s to the IRS, the IRS still knows how much you earned, so not reporting can cause major problems for you later.
What happens if I forget to report the info on my 1099?
Not reporting the information from your 1099 on your tax return can result in several different tax-related penalties, equaling up to 20% of the amount you did not report, plus interest.
What if I should have received a 1099, and I didn’t?
The deadline for a business to send a contractor a 1099 is January 31. If you do not receive your 1099 by February 15th, you should contact the person you did the freelance work for immediately. Don’t assume they know they need to send you one - chances are they probably didn’t know.
Sending a 1099
Who needs to send a 1099?
If your business paid a contractor (non-employee) $600 or more for the prior calendar year, you need to send each contractor and the IRS a 1099 by Jan 31 for the following year.
What do I do with a 1099 if I need to send one?
For small business owners who need to send 1099’s, you have to use the official form located on the IRS’s website, or provided through an authorized vendor (like Staples or even Quickbooks). When you fill out a 1099, you will actually fill out 3 forms: Copy A, Copy 1, and Copy B. Each copy contains the same information, but they all need to be sent to different places.
- Copy A - Goes to the IRS.
Note: These forms can only be ordered from the IRS or an authorized vendor - you cannot print these forms from the IRS website.
- Copy 1 - Goes to the state tax department.
- Copy B - Goes to the contractor / small business you paid for the work.
📣 I repeat 📣 You, the business owner who paid money to a contractor, have to send copies A, 1, and B of every 1099 you need to file to its respective destination (noted above).
If I get my 1099s from a place like Staples, how do I know if it’s legit?
For small businesses who like to fill these forms out by hand and want carbon copies, purchasing from an authorized vendor, like Staples, is an option. If you do this, make sure Copy A is red - that’s how you know it’s the real deal.
What happens if I forget to send in my 1099’s to the IRS?
If you forget, you’ll get something in the mail called a material penalty. The penalty is based on when you missed the filing period, and how many 1099’s you forgot to file. So even if you did miss the filing period, you still need to file them. The penalty increases the longer you delay filing.
This penalty also applies if you incorrectly reported information on a 1099.
When are 1099’s due to the IRS?
Businesses must send Form 1099-MISC to the appropriate recipients by February 1, and file it with the IRS by March 1 (March 31 if filing electronically).
Freelancers: You will receive a 1099 if you earned $600 or more in taxable income outside of a W-2. If you receive a 1099, you must report this income on your tax return.
Business Owners: You need to send a 1099 if you paid $600 or more to a contractor or small business.
If you’re still questioning what to do with a 1099, or have tax questions in general, reach out to your tax advisor who can help you navigate the choppy waters of tax compliance.