Being self-employed has many advantages, everyone else sees that you get to set your own hours, be your own boss, and price your own products/services. But what may seem like the “ideal” and “perfect” situation to others are actually their own disadvantages. The responsibilities hidden between the lines of these so-called “perks” are enough to confuse and overwhelm anyone.
On top of this, you’re tasked to take on the already dreaded time period (tax season) on your own.
Below you will find the most common questions we receive about 1099 forms from both payers and payees as well as answers to help clear up any confusion you (or someone you know) are facing…
“What is a 1099 form?”
The IRS refers to the 1099 forms as “information returns.” The forms report different types of incomes that individuals receive throughout a given year. This includes independent contractor income, interest and dividends, government payments, withdrawals from a retirement account and 1099-C for debt cancellations.
This also points to the question, what is a 1099 employee?
Simply put, a 1099 employee is a self-employed contractor or business owner as opposed to an employee.
“What is the $600 threshold?”
You are required to complete a 1099-MISC reporting form for an independent worker or unincorporated business if you paid that independent worker or business $600+. To find out if you must issue a 1099 for a payee, simply add all payments made to them throughout the year.
If the amount you paid the worker totals $600+, you must issue a 1099 form, however, if the amount you paid the worker totals less than $600 for the tax year, then you are not required to issue a 1099 form.
(Keep in mind: there are special threshold rules for reporting certain other types of payments, such as payments made to attorneys and sales of consumer goods for resale. In this post specifically, we are speaking only of payments to independent workers or unincorporated business service providers. You’ll need to consult the IRS 1099-MISC form instructions or with a tax professional for details on reporting those types of payments.)
“What type of income do I report on a 1099 form?”
The 1099-MISC should be used for reporting payments to independent workers — not payments to employees.
Independent workers are typically self-employed individuals or small service firms that you hire as independent contractors. Examples of independent workers might include a graphics designer, Web developer, cleaning service, freelance writer, landscaping or grass cutting service, forum moderator or another self-employed provider. The key is that the independent worker is self-employed — and not your employee.
You also use the 1099-MISC for reporting payments made to unincorporated business service providers, attorneys and partnerships.
“Do I need to issue 1099 forms for payments made to corporations?”
No, in general you do not need to issue 1099 forms for payments you made to a corporation. For instance, if you pay a corporation that, say, provides Web design services or some other business service, you do not need to issue a 1099.
Keep in mind that an LLC or limited liability company is not the same as a corporation. In general, you are expected to send 1099-MISC forms to most small-business LLCs.
Note, there are a few limited exceptions to the corporation rule. For example, if the payment is to a corporation for legal services, you must report those on the 1099.
“What if I was paid electronically as an independent worker or service provider?”
If you were paid electronically, such as through PayPal or a credit card, the payer is not required to issue you a 1099-MISC.
Instead, the reporting responsibility lies with the electronic service, which may issue a 1099-K.
However, some small businesses elect to send the 1099-MISC forms anyway, in an abundance of caution.
“Am I required to issue 1099s for payments made for personal purposes?”
No. You are required to issue 1099-MISC reports only for payments you made in the course of your trade or business. (If you run a non-profit organization, that’s considered a business for purposes of 1099s.)
“What if there’s an error in a 1099 form?”
A payer who later discovers an error should re-issue a corrected 1099 form to that payee and correct the filing with the IRS.
And if you are a payee, be sure to review every 1099 you receive against your own records. This is for a couple of reasons:
The payer may have made a mistake, such as the wrong amount. If so, contact the payer and ask to have the 1099-MISC form corrected and reissued.
In the event of an error, the IRS instructions to recipients say, “If this form is incorrect or has been issued in error, contact the payer. If you cannot get this form corrected, attach an explanation to your tax return and report your income correctly.”
(We go more in depth about this here: Common Form 1099 Filing Mistakes and How to Correct Them)
“Is there a penalty for NOT issuing a 1099 MISC form?”
Yes. Penalties can vary per form, depending on how long past the deadline the company issues the form. If a company intentionally disregards the requirement to provide a correct payee statement, it is subject to a penalty with no maximum amount.
What if I received miscellaneous income during the year and the payer never sends me a 1099 form?
If you performed work as an independent contractor and you earned at least $600 from a payer, that payer is required to send you a 1099-MISC form. But if you received less than $600 from that payer — say you received $350 — don’t expect to receive a 1099 form.
Let’s say you did earn $600+ for the year and the payer fails to send out 1099 forms. Or let’s say you moved and forgot to tell the payer, and so you don’t receive the 1099. In such situations, contact the payer and ask them to quickly mail the form or a duplicate copy out to you.
And remember, you are not excused from reporting your income, just because you never received a 1099 form (or because your income falls under the $600 threshold). Don’t rely on receiving 1099s for tracking and reporting your income.
Always track income independently and reconcile your bank records. And report all income.
“Where can I get the 1099-MISC forms?”
Order tax forms from the IRS here.
Final Thoughts -Always consult with a professional!
The information above is to be used for general educational purposes instead of tax advice. Remember, because the tax code is extremely complex, only generalities can be used in one post. There are many exceptions and ongoing changes to the rules, and individual facts can make a difference.
If you are looking for more detailed information and specific answers to your unique questions, our financial experts are more than happy to help. When you reach to one of our tax advisors, you will receive a free, no obligation consultation. Our MCDA CCG, qualified financial advisors know how stressful tax situations can be, therefore, we strive to equally acknowledge the valued time of each of our clients, and structure our services accordingly.
Whether you are a small business with few employees, a firm with a significant workforce, or a one man-or-woman-band, we’ve got you covered. With many tax deadlines in our rearview mirrors and others ahead of us, it’s imperative that you are on track. Don’t wait, reach out by getting in touch today!
Other MCDA CCG resources you may like…