Roads, bridges, vaccines, weather satellites—taxes pay for a lot of good things. And although few people look forward to tax season, the process of filing a W2 to report employment income can be relatively straightforward: Most employers withhold income taxes, Social Security taxes, and Medicare taxes from employee paychecks and report their total income and withholdings directly to the Internal Revenue Service (IRS).
Nonemployee compensation, however, is a bit more complicated. Payments made to nonemployees don’t show up on a W2. Instead, the IRS requires payers to report payments (over $600) on a tax form known as a 1099. 1099 forms help the IRS track nonemployee income and discourage underreporting on federal returns.
What is a 1099 form?
IRS form 1099 is a tax form that businesses, financial institutions, and other entities use to report payments to nonemployees. Nonemployees include independent contractors, freelancers, and other self-employed individuals that are not considered employees of a business. Since 1099s don’t include FICA tax withholdings, self-employed individuals pay their version called a self-employment tax. The 15.3% tax rate is the employer and employee shares of taxes.
Like W2s, 1099 forms are considered information returns, which means they contain information about a taxpayer but do not detail tax liabilities.
What is the purpose of the 1099 form?
The IRS uses the 1099 to track nonemployee income, and taxpayers use them to correctly prepare and file income tax returns.
1099s can help taxpayers and federal, local, and state tax departments ensure the accuracy of taxable income reported on tax returns. For example, they can help self-employed individuals track total income earned through various freelance or contract positions in a given tax year.
Who needs to file a 1099 form?
Any business that pays a freelancer, independent contractor, sole proprietor, or member of a partnership or LLC more than $600 in a tax year is required to file a 1099 form. The $600 threshold applies to payments such as rental income, prizes and awards, medical and health care payments, and payments made from a special type of arrangement known as a notional principal contract.
Financial institutions, lenders, and federal and state tax authorities must also provide these tax forms to individuals who have received payments such as royalties or brokerage payments of $10 or more during a given tax year.
How do you file a 1099 form?
In order to file a 1099 form, you first need to gather specific tax information from the payee. Businesses typically collect this information from independent contractors using Form W9. Best practices involve obtaining a completed W9 from any contractor before beginning a work engagement—this ensures that your business has all of the information you need to file 1099 forms come tax season.
Obtaining accurate 1099 information can help both businesses and contractors avoid penalties. Contractors who provide an incorrect taxpayer identification number (TIN), for example, can be subject to backup withholdings, which requires the payer to withhold taxes from nonemployee payments at a flat rate of 24%. Withheld taxes can be applied as a credit against any tax liabilities on the payee’s federal return.
The information required on a 1099 includes:
- Payer’s full name and address
- Recipient’s full name and address
- Recipient’s taxpayer identification number (TIN). For independent contractors, this is often a Social Security number (SSN) but can also be an EIN, or federal employer identification number.
- Payer’s TIN
- Total nonemployee compensation
Once you’ve gathered all relevant information, it’s time to complete and file your 1099 forms. The IRS requires payers to complete two copies of each 1099 by the filing deadline—Copy A goes to the payee and Copy B goes to the IRS. The 1099 filing deadline is January 31 of the subsequent calendar year. Income earned in 2022, for instance, is reported on a 1099 due on January 31, 2023.
Electronic filing options are available through the IRS website, and many small businesses hire a tax professional to prepare and send 1099 tax forms.
Types of 1099 forms
There are multiple types of 1099 forms, each of which is used to record a different type of income or payment. Here’s an overview of some of the most common 1099 forms.
Form 1099-A records income from real estate transactions that result in debt cancellation. If you sell your house in a short sale (in other words, for an amount less than the sum of your outstanding mortgage debt) and this results in your mortgage lender forgiving some of your mortgage, your debt reduction is considered taxable income and reported on Form 1099-A.
Form 1099-B records capital gains or losses. They are typically issued for brokerage accounts. This form also records value gained through a barter exchange transaction, a transaction type in which individuals or entities agree to exchange goods or services without accepting monetary payment.
Form 1099-C reports income in the form of credit card or other debt cancellation or forgiveness. If, for example, your credit card company forgives $10,000 of credit card debt, that $10,000 is considered taxable income and must be reported on an income tax return. If your debt forgiveness involves a real estate transaction (such as foreclosure on a home), you might receive both forms 1099-A and 1099-C. The lender will issue Form 1099-A when you abandon the property, and your financial institution will issue Form 1099-C when it forgives the debt.
1099-DIVs report distributions in the form of dividend earnings, which are funds paid to a company’s shareholders out of its profits. Dividend earnings are a type of investment income.
Form 1099-G reports distributions received from local, state, or federal governments. This can include unemployment payments or tax refunds, credits, or refund offsets.
Form 1099-INT reports interest income from a bank account, brokerage account, or other financial institution.
1099-Ks are sent to freelancers, independent contractors, or any unincorporated business entity paid more than $600 from another business annually via credit card or an electronic payment app like Venmo or Zelle.
Form 1099-LTC records benefits paid out by long-term care insurance contracts or accelerated death benefits from a life insurance contract.
1099-MISC is used to report miscellaneous income such as rent, prizes and awards, and royalty income. Any individual who received payments of more than $600 in a tax year can expect a 1099-MISC.
Form 1099-NEC is one of the most common types of 1099s. 1099-NECs are for non-employee income: any business that pays an independent contractor, sole proprietor, or member of a partnership or LLC more than $600 dollars in a tax year by either direct deposit or cash payment is required to send the payee a 1099-NEC.
Form 1099-OID form records discounts, or when the security drops below face value, on bonds or notes. These discounts are considered taxable income.
Some cooperatives pay members patronage dividends. Any dividends in excess of $10 annually are recorded on Form 1099-PATR.
Form 1099-Q records money that you receive from a 529 plan, which is an education savings account. These funds are only considered taxable income if they are used for purposes other than qualified educational expenses.
Form 1099-R reports distributions from a retirement plan, such as a retirement pension, annuity, IRA, profit-sharing program, or other retirement account.
Form 1099-S reports proceeds from the sale of a home or other real estate property. Whether are not these proceeds are considered taxable income depends on a number of variables, so consult the IRS website or a tax professional for details on your specific situation.
Form 1099-SA records distributions on a health savings account (HSA) or different types of medical savings accounts (MSAs), including Medicare Advantage MSAs. These distributions are not considered taxable income if they are used for qualified health expenses.
Form SSA-1099 is also known as a Social Security Benefit Statement. This shows the total benefits you received from Social Security in the previous year.
1099 form FAQ
What is a 1099 form used for?
The IRS uses the 1099 to track nonemployee compensation; it’s used by taxpayers to properly file federal income tax returns.
Who needs to fill out a 1099 form?
Businesses or other entities must fill out 1099s and provide them to freelancers, independent contractors, sole proprietors, or members of a partnership or LLC who have earned more than $600 in nonemployee income during a given tax year.
Financial institutions, lenders, and federal and state tax authorities must also provide these tax forms to individuals who have received payments during a given tax year, including royalties or brokerage payments of at least $10.
Where do you get a 1099 form?
You can obtain 1099 forms from a qualified tax professional or online. If accessing forms electronically, be sure to use a reputable source like the IRS website, which has the most up to date versions of the forms available.
What happens if you don’t file a 1099 form?
Businesses that fail to file 1099s by the filing deadline can be subject to a fine. The fines for intentionally not filing 1099 forms in 2022 are a minimum of $570 or 10% of reported income per form—whichever is greater.