The 1099 form is used to report non-employment income that individuals earn throughout the year. It can be in the form of cash dividends from owning a stock or an interest income from a bank account.
Although you may not like getting tax documents, 1099 forms are essential in keeping track of your income outside your salary. The Internal Revenue Services (IRS) matches nearly all 1099 and W-2 forms against your Form 1040 and other tax documents.
If these fail to match, the IRS sends out a CP2000 notice to taxpayers informing them that they owe money. In this article, we will discuss the five most important things you need to know about 1099 forms.
1. There are many types of 1099 forms.
Not all 1099s are the same. There are 20 varieties depending on the type of income. Some of the most commonly used types are the following:
- 1099-INT- This is for taxpayers who earned over $10 worth of interest. Banks, brokerage firms, and investment firms usually send out this form.
- 1099-DIV- This is for taxpayers who earned dividend income. Dividends are usually in the form of cash payments paid to investors who own stocks or equity shares.
- 1099-G- This is for taxpayers who received money from the federal, state, and local governments such as tax refunds or unemployment benefits.
- 1099-R- This is for taxpayers who got a payout from a retirement plan, pension, or an individual retirement account. Some insurance contracts may also issue this form. Take note that not all retirement distributions are taxable so consult with a tax specialist if you’re unsure whether you should pay taxes.
- 1099-B- This is for taxpayers listing different transactions from a broker, such as the sale of stocks and other securities. Some transactions executed through a barter exchange would also be reported on this form.
- 1099-S- This is for taxpayers who have realized gains or proceeds from a real estate transaction. Real estate transactions could be a sale or an exchange. Depending on the taxpayer’s financial situation, proceeds from a real estate transaction may also be exempt from taxes. When in doubt, consult a tax specialist.
- 1099-MISC- This is for income that falls outside other 1099 forms. This could be money received from awards or prizes.
- 1099-NEC- Starting the 2020 tax year, some types of non-employee compensation must be reported in this form. It must be filed if a business paid a non-employee, such as an independent contractor, $600 or more. Self-employed individuals who worked as a freelancer and earned more than $600 may receive this form. Income could also include commissions, benefits, and royalties. If you’re self-employed and earned less than $600, you may not receive this form but must still report all income when filing taxes.
2. The IRS also gets your 1099 form.
All 1099s sent to you go to the IRS. The deadline for sending these forms to taxpayers is usually January 31, while others are due February 15. There are some 1099s due to the IRS at the end of February.
While most payers mail taxpayer copies by the end of January, they may also wait a few weeks to collect IRS copies and send them to the IRS, usually electronically.
3. All 1099s must be reported.
Never overlook 1099 forms to avoid being audited. All 1099s include the payer’s employer identification number (EIN) and the payee’s Social Security number. The IRS matches 1099s with the payee’s tax return, so you can’t simply ignore it. If you feel the information on Form 1099 is incorrect, you can explain it on your tax return.
4. Errors on your 1099 must be reported immediately.
Don’t delay checking your 1099s to be able to correct errors immediately. This gives you a chance to inform the payer immediately, so there’s still a chance to correct it before sending it to the IRS.
However, if the form has already been sent to the IRS, you may ask the payer to send a corrected form. There’s a section on the form where it can be indicated that it is correcting a previous 1099 so the IRS won’t add the amounts together.
Tax professionals are the best people to help determine the amount of income earned or how that income must be reported.
5. Payers must be contacted if 1099s are not received.
Taxpayers should have a record of all tax documents to ensure they have them in time for tax filing. Contact the payer to request the document if you didn’t receive your 1099 form. If it didn’t arrive on time, you must file your tax return by the tax filing day for that year.
The IRS will send you a letter indicating how much tax you owe if the payer submitted Form 1099 to the IRS and you didn’t receive your copy. All taxpayers must keep track of all income earned throughout the year to avoid misreporting income. You may also tap into the expertise of a tax professional to ensure that your taxes are filed correctly.
Whether you got all your 1099s or not, you need to report all your income when filing your taxes to remain compliant. While it isn’t the taxpayer’s responsibility to submit their 1099s to the IRS when filing, you must report any errors on your 1099 form.
All individuals and businesses must be aware of the guidelines surrounding Form 1099. If you have questions about your non-employment income and how to file correctly, partner with a trusted CPA firm such as Lear & Pannepacker, LLP.