Even if you’re among the 55 million freelance workers in the U.S., according to Upwork’s 2016 report, you might be wondering: What is a 1099 form?
That question might persist even after reviewing a beginner’s guide to filing taxes. The short answer is that unlike full-time employees receiving a W-2 form, independent contractors file their self-employed taxes using 1099s.
Whether you’re an Uber driver, an InstaCart shopper, or are working for yourself, you’re better off knowing much more about the form and how to file it properly.
What is a 1099 form?
If you’ve been freelancing long enough, you already know that your clients aren’t taking the taxes out of your paychecks. That’s why the 1099 exists.
A 1099 form shows you how much money you earned from a given client in a given year. This is what the IRS calls an information return.
The IRS requires every client that paid you at least $600 to complete a 1099, sending a copy to you in the process. If you’re a full-time employee at a company and have a side hustle, you could be including both a W-2 and a 1099 with your tax returns. The difference between the forms is that only the W-2 shows part of your pay being withheld for tax purposes.
If you don’t receive a form from a client (or you did less than $600 in business with a client), you’ll still be required to report that income during tax season. You just won’t receive a 1099 for it.
Types of 1099 forms
The most widely used 1099 is the 1099-MISC. It’s used by companies that paid you at least $600 in income.
There are other specific circumstances in which the 1099-MISC form might be required. This includes the cases of scoring taxable credit card benefits and receiving a cash bonus via a lender’s referral program. The form also covers rent, royalties, and awards.
The form itself will list your name, address, and Social Security number. It will also detail the type of work you did for the company and the amount of pay it netted you during the year.
The IRS refers to 15 different types of 1099 forms. Although you won’t need to worry about selecting your 1099 type — it’s sent to your mailbox by the payee — here are scenarios where you’ll receive some of the more common 1099 forms.
|1099-C||A lender files a 1099-C because your canceled student loan debt is taxable.|
|1099-DIV||A bank files a 1099-DIV because your account earned significant dividends.|
|1099-G||The government files a 1099-G because you received unemployment payments.|
|1099-K||PayPal files a 1099-K because you sold more than $20,000 worth of stuff on eBay.|
|1099-MISC||An advertising agency files a 1099-MISC because it paid you $15,000 for graphic design work.|
Who needs to use a 1099 form?
Both you and your client will use 1099 forms to communicate your business to the IRS. The person or entity that pays you at least $600 must send you (and the IRS) a 1099-MISC by Jan. 31.
Even if you don’t receive the 1099, you still need to report the income on your tax return. If you don’t have good records of your income from a client, you might nudge the client to file the 1099 or at least confirm how much money they paid you over the year.
Not all companies hiring freelancers will need to use the 1099 form. If you’re a freelance writer working for a publication via a freelancer platform like Upwork, for example, you only need to have a W-9 on file. Upwork, not the publication, then submits the 1099 form to you.
How do you file 1099 forms?
You should receive 1099 forms from your clients during February. All you’ll need to do from there is include them with your tax return, reporting on your other tax forms how much income you received from clients.
Say you’re a freelance designer, for example, and you receive a 1099-MISC detailing $10,000 worth of work. You’ll report that dollar figure on your 1040 form (also known as Schedule C or C-EZ).
From there, you’ll estimate your business expenses. If expenses like setting up your home office are less than your income, then you’ll be subject to self-employed taxes and income tax. Self-employment tax is levied upon independent contractors to cover Social Security and Medicare tax.
Handling self-employed taxes
The 1099 tax form is one piece of the puzzle for independent contractors. You’ll also be making deductions for expenses and planning quarterly tax payments to city, state, and federal governments.
If you’re not a fan of waiting on clients to send their 1099s every February, there’s a way to be more proactive. You might consider using Painless1099, which organizes your freelance income and sets aside a portion of each paycheck to cover your taxes.
Now that you know the answer to, “What is a 1099 form?” you can move onto more important stuff. In fact, there are plenty of money-management tools for freelancers that can make your side hustling life much easier.