If tax time comes and you don’t know what a 1099 form is, this tax joke may lighten any anxiety you have.
How do dairy farms do their taxes? Well, the ones with simple taxes can just use a “cowculator”, but the ones with real complicated situations have to go to an “accowntant.”
You may feel lost when you first hear about tax forms like 1099s. The truth is, tax forms seem more complicated than they are. This post details what a form 1099 is, when you need one, and the difference between a 1099 form and a W-2.
What Is a 1099 Form?
The IRS designed a series of 1099 forms called information returns to report various types of income and transactions. The forms include the payer and recipient’s name, address, and ID numbers. It’s imperative that this information, along with reported income, is accurate when reporting the information to the IRS. If a recipient reports income that’s different than what’s on the 1099, the IRS will send out a notice asking for an explanation regarding the discrepancy.
Small businesses and self-employed individuals who make payments to others during a calendar year report the information to the IRS. One example is a 1099-MISC form business owners send to independent contractors like freelancers, construction workers, and individuals they pay who aren’t employees.
For this type of information return, payers send a copy to the IRS and the recipients. Most 1099s include State copies and a payer copy. Each type of 1099 form has different boxes to complete and deadlines to send copies to recipients and the IRS.
When Do You Need a 1099 Form?
The 1099 forms below are used to report different types of payments and transactions. As a small business owner, you may only be familiar with a few of them; however, you may use some of them in the future.
- 1099-A: Lenders use this form to report the acquisition or abandonment of real property. Generally, the form is issued when a lender forecloses on a property because the borrower can’t repay the loan.
- 1099-B: Individuals who receive proceeds from broker and barter exchange transactions receive this form from brokers. An example would be cash, stock, or other property exchanged for corporate stock.
- 1099-C: Creditors issue this form to borrowers when they forgive or write off unpaid debts. That amount is treated as taxable income to the borrower when only a portion or none of the debt is paid.
- 1099-DIV: Dividends and capital gains distributions are reported on Form 1099-DIV. Banks and other financial institutions use the form to report the payments.
- 1099-G: Government payments such as unemployment compensation, state or local income tax refunds, taxable grants, and agricultural payments are treated as taxable income. If any federal income tax was withheld, the form shows the amount.
- 1099-H: Another type of income reported is money received as health insurance tax credit advance payments of your health coverage insurance premiums.
- 1099-INT: Recipients who receive at least $10 in interest are issued this form. Amounts may include interest on U.S. savings bonds and treasury bills, bonds, and notes. The form reports any interest that’s tax-exempt, investment expenses, and foreign tax paid (if any).
- 1099-K: When you use a service to receive debit and credit card transactions, the third party network issues a 1099-K for amounts exceeding $20,000 and when at least 200 individual payments were processed.
- 1099-LTC: Long-term care insurance and cash advances on life insurance policies paid out as benefits are considered reportable income.
- 1099-MISC: One of the most commonly-issued forms by small business owners, the 1099-MISC form reports a wide range of income sources. Examples include amounts of at least $600 paid for rent, non-employee services, prizes and awards, payments to an attorney, and other types of payments. Recipients must receive their copy by February 1 or by February 16th for 2020 for income reported in boxes 8 and 10.
Employers have until March 1st to file Copy A of the form to the IRS when filing by paper and March 31st when filing electronically. It’s tempting to file Copy A as soon as you send copies to recipients. Because mistakes in amounts and SSN and ITIN do happen, you have time to make corrections before submitting the forms. But also keep in mind that the IRS charges stiff late-filing penalties ranging from $30 to $100 per form.
- 1099-R: Passive income distributed from pension, retirement plans, profit-sharing programs, IRAs and annuities are reported on this form. If you borrow money from a retirement account or receive disability payments from life insurance, those amounts are also reported.
- 1099-SA: The form reports distributions from health and medical savings accounts. If you use all the money to pay qualified health expenses, the distribution isn’t taxable. Likewise, you don’t pay tax if you rolled over the distribution to another HSA, MSA, or MA account.
How Is a 1099 Form Different From a W-2?
Use the table below to understand the distinct differences between 1099s and W-2s.
|Issued to non-employee personnel who are self-employed||Issued to employees hired by a company through an employment agreement|
|Reports gross payments, no taxes are withheld||Reports wages tips and other compensation, federal, state, social security, and medicare taxes withheld|
|Recipients are responsible for paying estimated income taxes and self-employment taxes||Recipients report taxes withheld from their paychecks on their tax returns and pay additional tax when they owe tax on other income sources|
Don’t Let 1099s Ruin Your Day
Whether you whip out a calculator or visit an accountant, don’t let 1099s intimidate you. They help business owners report income so taxpayers pay the correct amount of tax on taxable income. Plus, it’s a legal way for a business to report expenses it pays to others. And don’t forget to turn to a professional tax preparer for help to avoid making mistakes and submitting inaccurate tax returns.