What on earth is a 1099?
If you’ve always worked a normal job and received a W-2 from your employer, you may not be all that familiar with these forms. These are essentially a different kind of information return than a W-2, but no less important.
How it works is this:
- The 1099 form is a series of documents the IRS refers to as information returns.
- An information return is a form that is filed not by the taxpayer, but by the person that paid the taxpayer for a service.
- This information return tells the IRS that the taxpayer received money, and lets the IRS know that the taxpayer should be including this on their personal tax return.
- The person issuing this form will send both a copy to the IRS and a copy to the taxpayer, so the income can be reported properly.
Independent Contractor Income
If you are an independent contractor or a self-employed individual, you will receive a Form 1099-MISC from anyone that pays you at least $600 during the tax year.
Here are just a few examples of independent contractor jobs where the taxpayer should be issued a 1099 and report it to the IRS upon tax filing:
- Grounds Maintenance Work
- Independent Child Care Work
- Farmers and Ranchers
- Carpenters and Fabricators
- Editors and Writers
- Constructions Managers
- Hairdressers and Cosmetologists
- Janitors and Building Cleaners
- Real Estate Agents
- Community Association Managers
- Food Service Managers
- Dentists and Lawyers
- Truck Drivers
1099s for Interest and Dividends
If you own a portfolio of stock investments or mutual funds, you may receive a Form 1099-DIV to report the dividends and other distributions you receive during the year. Other types of investments you have may pay interest payments rather than dividends. These are also taxable and are reported to you on Form 1099-INT. Commonly, taxpayers receive this form from banks where they have savings accounts.
Federal and state governments also report to the IRS what they pay to taxpayers. This is known as Form 1099-G, which reports state income tax refunds as well as unemployment compensations received during the year. If you receive unemployment income, you must include that amount that reflects what your state reported on the 1099-G form in your taxable income.
The 1099-C for Debt Cancellations
Sometimes, even if you don’t receive a payment, a transaction can increase your taxable income. If this does happen, the IRS treats this debt cancellation as taxable income.
Here’s an example: If your credit card company no longer requires you to pay your outstanding balance, it will send you Form 1099-C to report the amount of debt that was canceled. You will then need to report this amount on your tax return.
However, the taxpayer may qualify to exclude canceled debt on the 1040 due to insolvency or if canceled debt is related to taxpayer’s principal residence. There are also other certain circumstances that would qualify as an exclusion.
Withdrawals From a Retirement Account
If you withdraw money from your IRA, you will receive a Form 1099-R that reports your total withdrawals for the year. Occasionally, the 1099-R will display the taxable amount of the distribution on the form itself, provide the necessary codes to determine taxability, and will report the amount of federal tax that was withheld.
Since the 1099 form that you receive is also reported to the IRS, the government knows about your income even if you forget to include it on your tax return. Once the IRS realizes you forgot, it will notify you and charge you penalties and interest starting on the first day your tax payment is late.
Penalty for Late Payments
Lastly, you can expect the IRS to impose a late payment penalty of 0.5 percent per month that late taxes remain unpaid. This penalty is capped at 25 percent. Don’t be late!
Contact us for more information or if you have any questions regarding 1099’s.