Tax Tips for Freelancers: What is the IRS 1099 Tax Form?
This article is accurate for returns filed through tax year 2017. Under the Tax Cuts and Jobs Act, some of the laws mentioned changed beginning in 2018. Learn more about the updated tax laws enacted under the Tax Cuts and Jobs Act here.
The world of freelance work is booming. While it is not actually a new endeavor—people have been working on a freelance basis for hundreds of years—the digital age has made it easier than ever to make a living on your own. If you are one of the millions who now rely on freelance income to pay the bills, you will need to get familiar with one specific IRS form—the 1099.
What is Form 1099?
Well, that depends on the type of income in question. The classic 1099 example is the form 1099-MISC, or form 1099 miscellaneous. As a freelance worker, this is the form you will receive from your clients at the end of the year—as long as those clients have paid you in excess of $600.
However, there are other types of 1099 forms as well. For instance, you may receive a 1099 for interest and dividend payments, for payments from the government, or for payments from your retirement account. So let’s walk through each of these types of 1099 forms.
1099-MISC: The Standard for Freelance Workers
As mentioned above, form 1099-MISC is the form you will receive if you complete freelance work for a client. The client is required by law to file this form as long as more than $600 in payments are made during the year. One copy of the form is submitted to the IRS, while another copy will be sent to you.
For freelance workers who only work with one or two clients during the year, collecting these forms will be simple. However, if you have a long list of clients who have surpassed the $600 threshold, you will want to be organized to keep all of these forms straight.
These forms are used to confirm that all earnings are reported to the IRS each year. When you work as a traditional employee who receives a W-2, the IRS is informed of your wages, so you are compelled to pay the appropriate tax.
As a freelance worker, however, your earnings would not be reported if not for these 1099-MISC forms. When you report your own earnings, the number you report will be compared to the 1099-MISC forms received by the IRS from your clients. If there is a major discrepancy between what has been reported and what is on your return, there may be questions to answer.
If you are a freelance worker, the 1099-MISC form should not be cause for concern. This form is simply how your income is reported to the IRS. Collect all of the forms you receive, compare them to your own records, and report an accurate amount of income on your return. Of course, you should keep these forms along with the rest of your tax documentation, in case of an audit down the line.
1099-INT: Interest and Dividend Payments
When you receive income in the form of interest or dividends, you will be sent a form 1099-INT to report that income. The threshold here is low—just $10—so you are likely to receive at least one of these forms at the end of the year, if not more. Any institution that pays you more than $10 in interest during the course of the year will be required to send you this form by the end of January.
For taxpayers who exceed $1,500 in interest income during the course of the year, it will be necessary to complete Schedule B. On this form, you will need to indicate the name of each payer, along with the amount of interest paid by each.
Of course, if you choose to e-file, this process will be made quite simple by the tax software you are using. As was the case with the 1099-MISC forms, it is wise to keep these forms for your records and make sure the information on the forms matches up with what you see in your accounts.
1099-G: Government Payments
When you receive money from the government, you might be tempted to think that those payments would be exempted from tax considerations—but that would be incorrect. If you receive payments from the government in one form or another, it is likely that you’ll receive a form 1099-G to document those payments. And, of course, the income represented on this form is going to be added to any other forms of taxable income you may need to report.
There are a couple of common examples of reasons you would receive a 1099-G. The first is unemployment benefits. If you have been paid unemployment benefits by your state during the year, those benefits are subject to income tax. It is likely that taxes were withheld from those benefits, but it is still necessary to report this income on your annual return.
Also, you may receive a 1099-G if you received a refund on your previous years’ state income tax return (if you live in a state with income taxes, of course). It is possible to receive a 1099-G for other reasons, but unemployment benefits and state income tax refunds are the two most common scenarios.
Form 1099-R: Retirement Account Payments
Withdrawing money from a retirement account is another event that could trigger the issuance of a 1099. In this case, it would be form 1099-R, which is a form that is used to report withdrawals from a traditional IRA. It is also possible that you’ll be sent a 1099-R when you accept other forms of distribution from accounts like pension plans and annuities.
If you are taking money out of your IRA before you have reached retirement age, it is likely that this money will be taxable. As such, you’ll need to report everything that is indicated on your 1099-R, and you’ll want to plan your expected tax liability accordingly. It is possible that reporting these withdrawals will reduce the amount of your refund, or it will increase the amount of money you owe as part of your return.
The four types of 1099s listed above are common tax situations. Nearly every freelance worker is going to be familiar with Form 1099-MISC, and even those in traditional employment situations will be subject to other types of 1099s depending on their financial situation.
In addition to those listed above, there is also a 1099-C Form, which is used in cases of debt cancellation. If you have a debt cancelled by a creditor, the amount of the cancelled debt is likely to be added to your taxable income, thus the need for Form 1099-C. Again here, the information on this form will need to be included in your return, and your tax refund/liability will be affected as a result.
We hope we’ve helped you out if you’ve been wondering “What is an IRS Form 1099?” As you can see, schedule 1099 is used in a variety of different situations. For freelancers, the 1099-MISC basically takes the place of the W-2 as an income reporting vehicle. The money you earn throughout the year is going to be reported to the IRS at the end of the year through 1099s.
Whether you have a collection of 1099s due to freelance work, or you have others to report based on things like interest and government payments, treat these documents as carefully as you would any other tax information.