If you’ve landed here after Googling “What is a 1099 Form?” because you’ve turned a profit as a small business owner, congratulations! Now begins the slightly less fun, but necessary job of accurately reporting your income for tax purposes. Your income as an independent contractor will most likely be reported using at least one type of 1099 form.
1099 is the umbrella term for a few dozen tax forms that account for payments made to individuals or businesses by entities other than their employer. All qualified monies you receive from sources other than your employer, such as clients, real estate sales, or dividends, must be reported on a 1099 form. If you’re still holding a day job while you’re getting your business off the ground, the wages you receive from your employer are recorded on a separate W-2 form.
Who does the 1099 form apply to?
Generally, the 1099 form applies to independent contractors, sole proprietors, limited liability corporations, and other business entities. However, you might be surprised to learn that not all income-generating activities are classified as business activities. In fact, the IRS lays out fairly clearly how it determines if something is considered a hobby or a business. In order for income to be counted as business income, it has to check off several boxes according to the IRS. Here are a few of the questions the IRS looks at to determine if your activity is subject to additional taxes.
- Do you maintain accurate books and records of your activities income?
- Do you engage in this activity for the purpose of making a profit?
- Do you alter your operations or methods for the purpose of increasing your profits?
- Do you maintain the necessary knowledge about your activity required for operating a successful business?
- Do you regularly and actively participate in this activity?
To put this into a real world situation, this means that if your friend pays you a few bucks to make cupcakes for their party, there’s no 1099 required for this transaction (but you should technically still report it on your taxes!). However, if you realize that you’re the best cupcake maker in town and you decide to start a catering business as a sole proprietor, then you’re probably reaching 1099 territory.
Business income you make as an independent contractor is taxed on a pass-through basis, which means that it’s added into your personal tax liability, and not subject to taxes as a separate entity. However, you’ll still be responsible for paying self-employment taxes on this income. The current self-employment tax rate is 15.3%, and this tax revenue is specifically allocated to contribute to Social Security and Medicare.
When do you get 1099s?
There are several key tax dates you need to know as an independent contractor.
- January 31st: The last day for all businesses or other entities to send the required 1099 copies to the IRS and to you.
- April 15th: The deadline for filing your personal tax returns with all 1099s included.
- October 15th: The final date for filing your personal tax returns if you’ve been granted an extension.
You can receive 1099s via paper mail or email, provided that you specifically consent to receiving the forms electronically.
P.S. With or without a 1099, you still need to report all of the income you made during the year as an independent contractor.
Types of 1099 forms
While the conventional wisdom is true that you can expect a 1099 form if you’ve completed more than $600 in contract work, there are also many other types of 1099 forms doled out every year. The nearly two dozen 1099 forms within the tax system are meant to capture virtually all types of non-employment compensation. Here are some forms in the 1099 series that might be most helpful and relevant to you as a sole proprietor.
This is likely going to be the crucial 1099 for you as an entrepreneur, since it’s where you’ll see a record of qualifying payments made to you by your clients. Originally, the 1099-NEC was used to record non-employee compensation, but was decommissioned in the early 1980s in favor of the 1099-MISC. In 2020, the 1099-NEC was reintroduced by the IRS as the requisite form for reporting non-employee compensation. Each of your clients should file a 1099-NEC for payments made to you totaling $600 or more.
As an independent contractor, you’ll take the information on the 1099-NEC and include it on your Schedule C (1040 form). An important note here is that multiple Schedule C forms are needed if you operate more than one business completing unrelated work. For example, if you made $5,000 developing websites and another $3,000 doing professional photography, then you must report these amounts on separate Schedule C forms.
The 1099-MISC form is meant to account for various forms of miscellaneous income that cannot be properly categorized on any other form in the 1099 series. This can include prize money you won, royalties you received, and certain expenses you paid related to your medical care. Form 1099-MISC is also used to report rental income and payments made to attorneys.
For example, if you own rental property and your tenants pay rent to a property management company that you’ve hired to handle your property, then you’ll receive a 1099-MISC from the property management company.
Qualified legal fees must also be reported using the 1099-MISC. The rule is to use this form if you paid an attorney of whom you were not a client. An example of this situation is if you purchased commercial property for your business and you paid closing attorney fees.
The 1099-A is a real estate tax form that is used to report the acquisition or abandonment of a secured property. While a foreclosure might result in a technical capital gain in the eyes of the IRS, there’s a good chance you’ll be exempt from paying taxes on it due to the capital gains exclusion measure for primary residences. Selling your home for less than your outstanding mortgage amount, commonly known as a short sale, also results in receiving a 1099 for the transaction.
1099-B accounts for transactions involving a broker, which includes sales of stocks, commodities, and other types of securities. Note that you need to include a 1099-B with your tax returns regardless of if you had a gain, loss, or broke even on the sale. Additionally, Form 1099-B comes into play if you, as an individual or small business, barter goods and services with another entity.
Form 1099-C is similar to Form 1099-A, but the difference is that the C stands for canceled. The 1099-C is completed when an outstanding debt greater than $600 has been canceled by the lender.
If you’re a shareholder in a business that underwent a substantial change, such as an acquisition or change in capital structure, then you’ll receive a 1099-CAP.
Dividends are monetary rewards that companies pay out to shareholders. If you invest in a company and receive dividends in excess of $10, you’ll receive Form 1099-DIV. Note that you might not have to pay taxes on your dividends if you have other losses or deductions to offset the gains.
Any money you receive from the government needs to be recorded on a 1099-G form. For example, if you were unemployed at any point during the year and collected unemployment compensation, the Department of Revenue will send you this form stating the amount paid to you and any taxes that were withheld. Unemployment benefits are considered taxable income, so you’ll need to include this form when you file your taxes. Additionally, you’ll receive a 1099-G form if you receive a local tax refund.
Form 1099-INT is sent to you by a bank or financial institution if you received over $10 in interest during the year. So, if you placed the profits from your business into a high-yield savings account that earned you more than $10 in interest, you can expect a 1099-INT.
Accepting payment credit or debit payments as a small business owner requires you to report these transactions using Form 1099-K. In 2022, the reporting thresholds decreased from $20,000 and 200 individual transactions to $600, regardless of the number of transactions. This means you can now expect to receive 1099-K forms from PayPal, Venmo, CashApp, and any other payment processors you use for handling your business transactions. Form 1099-K is also sent to gig workers who work on platforms such as Uber and DoorDash.
Insurance companies are required to provide policyholders with Form 1099-LTC when benefits are paid out on a long-term care insurance policy. If you received long-term care benefits because you’re unable to care for yourself, your insurance company will provide you with this form indicating the total amount paid to you. It’s important to note that you might not owe taxes on the stated amount.
Form 1099-OID is required when a taxpayer purchases a bond for less than its face value. The issuer or seller is responsible for filing this form and providing you a copy. For example, if you purchased a bond with a $1,000 face value but you paid $800 for it, this $200 discount is considered taxable income. And, since it’s over the $10 threshold set by the IRS, you’ll receive a 1099-OID for it.
Cooperatives that pay patrons or investors a dividend must send Form 1099-PATR to recipients.
If you invest some of your business’s proceeds into a cooperative and you receive a dividend payment, you’ll be sent a 1099-PATR indicating the amount you received in dividend payments.
529 accounts are special investment accounts to which you can contribute funds and then make tax-free withdrawals for qualified expenses related to higher education. People typically start 529 accounts for their children’s higher education expenses, however, you can open a 529 and designate yourself as the beneficiary if you are furthering your own education. If you make withdrawals from a 529 account and have yourself designated as the beneficiary, you’ll receive a 1099-Q reporting the amount distributed to you.
If you’ve retired from your full-time job and are now collecting a pension, you’ll receive a 1099-R reporting the total amount paid to you. Plan managers are required to send this form to you if you received a distribution from the fund totalling $10 or more. 1099-R is also used to account for payments made from annuities, profit-sharing plans, and individual retirement accounts.
This is another real estate-related 1099 designed to capture financial information about the sale of property. Let’s say you owned a small commercial property that you sold to purchase a larger property for your business. Provided you sold the original property for a gain, you or your closing attorney will need to file a 1099-S reporting the proceeds collected from the sale. With the purchase of the second property, you have a responsibility as the buyer to file Form 1099-S, though you can stipulate that the seller is responsible for taking care of this.
As an entrepreneur, you won’t have traditional healthcare coverage through an employer-subsidized plan, but you can still open a health savings account on your own. You can use funds on qualified, medical expenses tax-free, or you can use the funds on non-medical expenses at a 20% tax rate. You’ll receive a 1099-SA showing your total distribution amount for the year, and how much you owe in taxes for non-qualified medical expenses, if anything.
How Neat Can Help You Prepare for Tax Season
You might know how to build the best websites, take the prettiest pictures, or bake the most delicious cupcakes, but filing taxes might not be your forte as an independent contractor. Now that you’re no longer scratching your head and asking, “What’s a 1099 form?!,” hopefully you feel more confident about navigating the tax system. Fortunately, Neat is here to help you keep records of your payments, expenses, and other financial documents to make filing for taxes a breeze. Contact a qualified tax professional to ensure that you’re paying what you owe, and also taking advantage of every deduction you’re entitled to as a small business.