What is Form 1099

1099 forms are used by taxpayers for the provision of information to the Internal Revenue Service (IRS) about the different types of income they receive apart from their usual salary during the year. This external income may include bank interest, investment dividends, or income from freelance work.

The function of the 1099 form is to report all of their income during the year so that the IRS can collect the correct amount of taxes. There are many different 1099 forms, but they all fulfil the function of providing information to the IRS.

It is the responsibility of employers or financial institutions to create all 1099 forms for any independent contractors or partnerships that they have hired during the tax year. They are required to file their 1099 forms to the IRS by January 31. Taxpayers will then receive their copies of their 1099 forms by early February.

YOU WILL NEED TO FILE A 1099 FORM IF:

All contractors whose work exceeded $600 for your business should receive a 1099. You are responsible for completing your contractors a 1099 of you hired and paid them over $600 in the tax year.

Partnerships also must be issued a 1099 form if a business has paid them $600 or more during the tax year.

YOU WILL NOT NEED TO FILE A 1099 FORM IF:

You will not be required to file a 1099 if you:

• Are not engaged in a trade or business

• Are engaged in a trade or business and payments were made to another incorporated business, not for medical or legal reasons or the sum of all payments made to an individual or unincorporated business was less than $600 within the year

1099 DO’s AND DON’Ts

DO:

• Send 1099s to all your contractors, service providers, lawyers, accountants, architects or commissions, who you paid $600 or more to over the course of the tax year.

• Keep in mind the deadlines for the 1099. Be sure to file with the IRS by January 31.

• If you have over 100 1099 forms to file, you will have to file them electronically and cannot submit paper forms, due to the Taxpayer First Act. If you submit paper forms when you are supposed to file electronically you will face a penalty

• Report the taxpayer ID and file it correctly

DO NOT:

• Report any personal payments, only payments made from your business should be reported

• Usually, you do not have to file the 1099 forms you have acquired as a taxpayer

• File 1099 form for an employee as this is classed as misclassifying your employees as independent contractors

• Leave it until the last minute – save time and stress by completing them early!

Returns must be complete and correct to obviate any penalties.

Employees vs Independent Contractors

1099 forms only need to be issued for independent contractors, not the business’ employees. If you are a business owner and misclassify your employees and independent contractors you will face a penalty fine.

Employees are paid a regular wage and have taxes deducted from that wage, whereas independent contractors are paid for freelance projects, pay their taxes themselves and their work is not dictated by an employer. The IRS consider independent contractors as self-employed, therefore they have to pay self-employment tax.

In the situation where the IRS finds that a business is misclassifying employees as independent contractors then it will order the business to pay back taxes, in addition to penalties for income tax, Social Security, Medicare and unemployment tax.

TYPES OF 1099 FORMS

FORM 1099-DIV: Dividends and Distributions. If you have paid dividends and other distributions on stock of at least $10 or more (including capital gain dividends and exempt interest dividends), for those who you have withheld and income tax on dividends, and those who you have paid $600 or more. (If you make a payment and are unsure whether the whole payment is a dividend at the time of filing then the payment must be reported as a dividend)

FORM 1099-INT: Interest Income. All payers of interest income, including brokerage firms, banks, mutual funds and other financial institutions, are required to file Form 1099-INT to their investors, including a complete breakdown of the types of income and any related expenses. They must file Form 1099-INT on any interest payment of over $10 made in the tax year.

FORM 1099-MISC: Miscellaneous Income. This form is completed and send out by one who has paid at least $10, in royalties or broker payments to an individual. It is also sent to those who received $600 or more in: rents, services performed by a non-employee, prizes and rewards, other income payments, payments to attorney, cash paid from a notional principal contract to an individual, partnership or estate, medical and healthcare payments.

FORM 1099-R: Distributions from Insurance Contracts, Pensions, IRAs (Individual Retirement Account), Annuities, Retirement or Profit Sharing Plans. If you receive a distribution over $10, you will be need a 1099-R form and this will be provided by the plan issuer who will give a copy to the IRS.