Anyone who has paid taxes before knows that the forms you’re sent each year can be confusing and overwhelming. They have similar names, similar purposes, and intricate instructions. How do you figure it all out?
Fear not! These forms are actually quite simple to get through if you understand what they’re for. The 1099 form in particular is for private contractors and self-employed individuals. If that’s you, the 1099 form is one of the most important pieces of paper you’ll receive each year.
1099 forms are different from the W-2 forms that many people are used to filling out during tax season. Private contractors and self-employed folks have distinct responsibilities to the IRS.
Read on for a basic walkthrough of the history of the 1099 form and why it’s different from other tax forms. We’ll also cover the many different types of 1099 forms, because there are more than you might expect!
What Is a 1099 Form?
1099 forms are used to help taxpayers report any income they made throughout the year that wasn’t earned through their usual salary. These “non-employment related sources” are still taxable, so make sure that you keep records of all your income, no matter the source.
What kind of work would fall under this umbrella? Freelance work that you do outside of your normal job would be considered a non-employment-related source.
1099 forms are also used to report income you earned throughout the year from investments. If you earned dividends in the stock market, you’d include that on your 1099.
Interest that you earn when you open a savings account with a banking institution is also typically reported using a 1099 form.
1099 forms are very important when you’re filing your taxes. You must make sure they are filled out accurately. If you don’t report all your income for the year from non-employment-related sources, you could be subject to an audit by the IRS.
History of the 1099
Form 1099 came about in 1917 when the War Revenue Act was established. This act required taxpayers to report payments that they made to other entities, including interest payments, rent, wages, salary, premiums, annuities, remuneration, emoluments, compensation, grains, profits, and income.
If such payments added up to at least $800 throughout the year, the person who owed the money would have to report the name and address of the person they were paying on Form 1099, which they would send to the Internal Revenue Service by March 1 of the following year.
The recipient of the money would also submit a form to the IRS that certified the information provided on the payee’s 1099 is correct. The form the payee used was called Form 1096.
Who Completes Form 1099?
Form 1099 is usually not for the individual taxpayer to complete. The business or institution that has paid you outside of your regular salary is typically the one responsible for completing a 1099 form for you.
When the forms are complete, that business or institution sends the 1099 to you so that you can give it to the IRS. Usually, this happens around early February. If an institution is going to send you a 1099 form, they are typically required to do so by January 31 each tax season.
1099 and 1040: What’s the Difference?
Form 1040 is the form that standard employees use to file their tax returns. The 1040 helps to determine if an individual is owed a tax refund, if they owe more in taxes, and how much of their income for the year is taxable.
On the 1040, you report the year’s wages, your salary, taxable interest, capital gains, Social Security benefits, pensions, and any other types of income.
The 1099, on the other hand, is used by the IRS for information accuracy. The IRS already has its own data about the income each taxpayer has earned each year. They then use Form 1040, Form 1099, and W-2 forms to make sure the information they have matches up with the information that each taxpayer provided.
The Many Different Kinds of 1099 Forms
There are multiple different kinds of 1099 forms that you will use to report various types of non-employment-related income. These include:
Dividends and Distributions
You should receive a Dividends and Distributions 1099 form if you own stocks or funds that pay dividends. This form is referred to as Form 1099-DIV.
The 1099 for Interest Income is pretty straightforward. It is used for income that comes from a bank account that earns you interest. This could be a checking account or a savings account. This form is referred to as Form 1099-INT.
Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, Etc.
This form has an extra-long name, but it’s very self-explanatory. If you received payments from any of the sources included in this form’s name–anything totally over $10–you will fill out this form come tax season. This form is known as Form 1099-R.
You will probably only receive this form, Form 1099-MISC, if you worked for someone as an independent contractor throughout the year.
Proceeds from Real Estate Transactions
This form, known as the 1099-S, will be issued by whoever is responsible for closing the real estate transaction. If that person cannot issue the form, then this is the order in which it will be issued: the mortgage lender, the transferor’s broker, the transferee’s broker, or by the transferee.
Pension and Annuity Income by the Railroad Retirement Board
This seems like a pretty niche form, but it applies to people out there! This form is called the RRB-1099. Any amount paid to the Railroad Retirement Board can be taxed through this form.
Health Insurance Advance Payments
The 1099-H form is issued by providers of health insurance coverage. This form will be sent out for any amount of money that has been paid to the health insurance institution.
Merchant Card and Third-Party Network Payments
Banks and other payment processors will send out forms that are known as 1099-K forms. Payments of at least $600 will be reported through the 1099-K.
As you can see, there is pretty much a 1099 form for every type of payment one could make. The institutions are responsible for sending out these forms, so if you need to file one, you should receive it in the mail when it’s time to submit your taxes.
What 1099 Employees Should Know
Folks that are self-employed or who work as private contractors must file their 1099 forms. Taxes work differently for 1099 workers than W-2 workers, so it’s important to make sure you file your forms accurately.
These are a few pertinent things to remember if you are self-employed or working as a private contractor.
The first thing to know is that if you’re a 1099 worker, you will have to pay a self-employment tax. This tax applies to the FICA payments you make to the country’s social security programs. Typically, employers pay half of the FICA tax for their W-2 employees. These taxes are automatically paid.
However, it doesn’t work that way for 1099 employees. 1099 workers must pay their full FICA tax themselves, and they have to make sure they have enough money to do so when tax season rolls around.
Another important thing to remember is that you will have to pay quarterly income taxes as a 1099 worker. Because W-2 employees will have a certain amount of their pay withheld by the employer for taxes, they don’t have to worry about not having enough set aside when tax season arrives.
1099 employees, on the other hand, don’t have an employer to set aside their taxes ahead of time. Thus, the IRS requires more frequent tax payments so that they know you’re paying your dues ahead of time.
Today, the IRS has a system in place that allows 1099 employees to easily pay these “estimated taxes” through their website. In the past, you would have to mail in your taxes each quarter if you were self-employed or a private contractor.
Why Saving Is So Important
This can all seem very daunting to the new 1099 worker, but there’s a solid way to make sure you have enough money to take care of your tax payments and your FICA dues: Save!
Many tax experts recommend that 1099 workers start a savings account solely for taxes. This is because it’s easy to forget that every time you get paid, some of that money will have to be paid back to the government.
Many 1099 employees will spend their paychecks as though all the money belongs to them. Then, when taxes are due, they realize they didn’t save enough money from their checks in order to pay what they owe.
Having a savings account that you regularly contribute to is a great way to ensure you do not end up facing a huge debt. It’s important when going from a W-2 to a 1099 position to reframe your mindset so that you are saving your money all the time.
Because your employer is no longer taking care of that for you, it’s your responsibility to keep enough in your savings to protect you financially.