If You Received a 1099
Tax time can be more complicated with a 1099. You are required to pay self employment taxes – employee and employer portions of Social Security and Medicare along with income taxes. Failing to make estimated taxes could lead to penalties and interest that can quickly increase the amount you owe.
First, check with your employer. Then, request an extension to avoid the failure to file penalty.
Did you start a new job last year with the assumption you were an employee? If the 1099 form was a surprise, you need to check with your employer. There may have been a misunderstanding.
The rules distinguishing an employee from an independent contractor are complicated. In general, if the company you worked for controlled your hours, how you did the work and provided benefits, you may have been misclassified. If you fear you were inappropriately labeled a contractor, seek legal help from an experienced attorney at Silver Tax Group. There could be remedies that will lower your tax bill.
The “gig economy” is real, and it’s a growing part of the American workforce. With more than 15 million independent contractors, employers and workers alike need to know how to do taxes.
And it’s not just contractors that need the help. Some count the numbers of consultants, freelancers, and people with “side gigs” as high as 55 million.
Newcomers to contracting or consulting are preparing for tax time and wondering, “What is a 1099, and how do I file my taxes?”
Lucky for you, we’ve got answers.
Even seasoned workers might not know the difference between a W-2 and an IRS form 1099, but this FAQ will help you get a head start on your upcoming taxes.
IRS 1099 forms aren’t just for contractors either. This guide helps you through the many different types of 1099 forms you might come across. We break it down, and show you where to start!
We’ll start with the most common type of form 1099: The 1099-Misc. It’s mostly issued to independent contractors.
What is an Independent Contractor?
Companies often hire a mix of full-time employees, part-time workers, and independent contractors. An independent contractor is not the same as an employee.
Uber and Lyft drivers, freelance writers and designers, and housekeepers fall under this classification. So do many business, education, or strategy consultants.
Contractors are different from full and part-time employees in several key ways.
Independent Contractors vs. Employees
An independent contractor is not covered by the same labor or employment laws as other employees. Companies that hire independent contractors cannot dictate the time the contractor works, unless it is specifically stated in the contract, such as during meetings or events.
Employers also don’t pay into unemployment insurance for independent contractors. This means if you lose your contracting gig — you can’t claim unemployment.
Independent contractors also are paid in a different way than hourly or salaried employees. Employers do not take federal or state income taxes or social security withholdings out of an independent contractor’s pay.
Most of the time, contractors are paid in a lump sum, task, or project-based basis. Contractors are not typically reimbursed for expenses, while employees are.
For employers, this makes hiring independent contractors a bit easier come tax time than onboarding full-tilt employees. But you should be sure you’re following all the employee classification laws, so you don’t find yourself in a mess!
If you’re an employer who wants to avoid employee/contractor misclassification, we can help with that.
If you’re a contractor, this means your taxes can get tricky.
Contractors Get IRS Form 1099s
There are several types of IRS form 1009s, but the most general one that affects the most workers is the 1099-Misc form.
If you are an independent contractor, the company you contract with should issue one of these before January 31 of each calendar year. Even if you don’t receive a form, you are still required to report your income.
Many independent contractors aren’t skilled at tax form preparation and can inadvertently skip over write-offs. Some may miscalculate the taxes they owe on their 1099-Misc income. This can go on for years before it gets flagged.
If you’ve been threatened by the IRS or have any emergency tax issues, please take some time to learn more about our services. 24 hours is all we need.
What is a 1099 Form?
A company that has paid a contractor more than $600 during a calendar year will receive a 1099. The form itself is simply a log for the IRS that shows how much a client has paid you in any given year.
The contractor, freelancer, or consultant will use this form to input data about their earnings, calculate their taxes, and provide a record — and a payment — to the IRS.
Companies issue 1099s, and contractors receive them. The IRS uses your social security number to make sure these match up. To avoid penalties or an audit, make sure you report every 1099 you receive.
Types of 1099 Forms
The vast majority of IRS 1099 forms that Americans will receive before tax time are 1099-Misc. Freelancers, rideshare drivers, social media consultants, development consultants, and more will all find these in their mailbox before February 1. If you get a 1099 form, the IRS gets a duplicate copy, too.
If a company doesn’t send you a 1099-Misc, but you made more than $600 while they were your client, they can get fined for late or non-submittal. It’s crucial to understand that just because a client doesn’t issue you a 1099-Misc form, you’re still responsible for reporting and remitting your income tax.
A company or client might have to pay a penalty for not submitting information to the IRS, but you still have to pay your taxes — no matter what. Find out if your employer sends them via snail mail or e-mail. And make sure they have a good mailing address for you on file!
The IRS has 14 other types of 1099 forms. Some of the more common ones are:
- 1099-DIV for dividend stock payments
- 1099-INT for interest on any bank account
- 1099-G for unemployment benefits and tax refunds
- 1099-S for real estate transactions
- 1099-B for broker transactions
- 1099-K forms get filed through the PayPal service if you sell more than $20,000 on eBay
It can feel like there are 1,099 types of IRS form 1099! Work with a reputable tax preparer to help you sort out the many forms you may have to send in.
Entrepreneurs in the sharing economy are not always receiving the forms needed to complete their taxes properly. Misunderstandings are also common when it comes to self employment taxes and tax deductions.
More than 2.5 million people work (generally part-time) through services like Airbnb, Uber, Etsy and TaskRabbit to supplement their income. Most workers put in less than 10 hours a week in the so-called “sharing economy.” Leaving this income off a tax return and failing to set aside a portion to pay taxes can easily lead to an IRS tax audit with significant back taxes along with penalties and interest.
Study finds majority receive no tax guidance
The Kogod Tax Policy Center at American University surveyed small business owners working in the on-demand economy. Almost 70 percent didn’t receive any tax planning guidance from their sharing platform company. About 60 percent never received a 1099-MISC or 1099-K stating their earnings.
Almost half of the respondents didn’t know which expenses could be deducted against their income. Without proper documentation it can later be impossible to claim tax deductions that would lower a tax obligation.
With this background, you are in good company if you do not understand the tax consequences of earning additional money through the sharing platforms. Learning the rules can avoid a tax surprise and notice of deficiency letter from the IRS.
Here are some of the things that you need to know about income reporting requirements.
1099-MISC and 1099-K gap
Nina Olson, The National Taxpayer Advocate has asked for more guidance from the IRS. The current rules can be difficult to understand. If you make more than $600 in a year from a side-line gig, you should probably receive a 1099.
A 1099-MISC is used to report miscellaneous income received or paid in course of a trade or business. If you received $2,000 from Airbnb for renting a guest bedroom over the year, you’d likely receive a 1099-MISC with the amount you received listed in box 1. But certain credit card payment or paypal payments might need to be reported on a 1099-K.
Form 1099-K has its own reporting thresholds:
- $200 per transaction
- $20,000 income
These thresholds lead to some confusion. A small business owner selling jewelry through Etsy may make $8,000 through 80 different transactions would not likely receive either form.
Each situation is different, but earning an additional $15,000 on top of a full-time salary has tax consequences. When nothing is withheld it could result in a large unplanned tax bill.
When you receive correspondence from the IRS about a tax deficiency, consult a tax attorney. Often there are options available to resolve the matter that will not break your family finances.
Where Do They Go?
Employers will total your yearly earnings and send you a 1099 earnings statement if you are an independent contractor.
Typically, they send one form to you that’s a copy of what they send to the IRS. They may also remit this to your state.
You will also get a copy of your own earnings statement sent you. And employers will typically retain one copy of your 1099 for their own records.
How to Report Your Taxes
Every year — usually by April 15th — you must report and pay your taxes to the IRS. Some people don’t owe money every year, and some might qualify for a tax refund!
Independent contractors who qualify as self-employed individuals should pay estimated taxes quarterly, and report their earnings every year.
When choosing how to handle your taxes, you will be inundated with offers from companies that want to streamline the reporting process. Be careful: If you have IRS form 1099s to report, you might want to work with a professional firm.
For the self-employed, taxes can feel like a maze. There are write-offs, documents, and other difficult things to navigate. But with help, you can do it.
Self Employment Tax vs Income Tax
Be aware of what you’re paying, and why. Self-employed individuals usually work as contractors, so they will receive 1099-Misc forms to report to the IRS every year.
Income tax is different that self-employment tax. If you work for yourself, you have to pay into Social Security and Medicare.
When you work for a company, you will receive a W-2 statement instead of a 1099 form each year. These forms will show how much money the company has withheld from your paycheck to pay for Social Security and Medicare. But when you’re the boss, you’ve got to file these for yourself.
The self-employment tax rate is 15.3 percent as of 2018. Make sure to keep abreast of any changes on this front, and always be saving for tax season!
Filing a 1040
For those who are self-employed, you’ll be filing your income tax on a 1040 form. A good, basic rule of thumb is that your forms will somewhat match.
If you receive a W-2 at the end of each year, you will file a W-4. If you receive a 1099, you will file a 1040 form to report your earnings the IRS. If your gross self-employed income is more than $400, you must file this form.
A 1040 form is also called a Schedule C, or sometimes a Schedule C-EZ.
Avoiding audits is as easy as making sure that you report all your income and pay all your owed taxes. The process can be complicated, but the principle is simple.
What is a 1099 Mistake?
Clerical errors are common. Mistakes happen.
You may receive a 1099 form with an error on it. There could be a decimal out of place, or the number could be entered incorrectly.
The IRS can even make a mistake, such as double counting your 1099 form. If you asked for it to be re-generated and sent to you a second time — the IRS may think you made double the money for your contract labor!
Talk with the person who issued the form if you find a mistake. If they’ve already sent it to the IRS, they will need to mail a correction. If not, they can correct it posthaste.
Amending Past Tax Mistakes
You might not be dealing with a recent mistake, and that’s OK, too.
It is possible to amend past tax mistakes. You have three years from the date you filed the original return to correct a mistake on your taxes. You also have up to two years after the original payment to make a correction if you find a mistake.
Don’t let yourself worry if you find a mistake in the past. It’s better to correct it than let the IRS find it. Taxes are serious business!
Decreasing Your Audit Risk
The name of the game for the IRS is all about matching. If the earnings amount on your W-2 matches your W-4, you are doing it right!
And, if you’ve done contract work and the earnings listed on your 1099 forms match what you report on your 1040 form(s), you will also be at less risk for an audit.
The best way to decrease your chances of an audit is to work with trusted professionals to file your taxes properly each year. That way, if you do get audited — you won’t have to worry!
Sometimes, the IRS makes mistakes. You can get a bill for back-owed taxes, but a simple letter showing you were a student at the time can provide tax relief. Make sure to work with a tax attorney or other trusted individual if you are worried about back taxes or an audit.
Audit Time Limits
The IRS can’t raid your home and look at your entire financial history unless there’s a very good reason. Most people who get audited have made some small mistake in their reporting or no mistake at all. (You can get randomly flagged for an audit!)
You always want to talk with tax specialists to find out ways to decrease your chance of an audit, but you should also know that there are some limits.
The IRS can look at your financial records for the past three years in most cases. In other circumstances, they can sift through six years of financial data to spot check your tax practices.
Only in cases of obvious fraud or similar activity can the government search through your entire financial history.
Do your best to decrease your tax liability so you pay less, but balance that with good stewardship and accurate reporting and payment of the money you owe the government. If you do it right the first time, you can’t lose!
When Big Problems Hit
We understand. At Silver Tax Group, our tax attorneys are here for taxpayers and businesses that have time-sensitive issues with the IRS and other tax-related business. If you’re worried about potential tax settlements or drastic action by the IRS, we’re the tax attorneys that will take your case on quickly and help you resolve it with swift justice.
We’re Here to Help
Maybe you’re a taxpayer who’s in big trouble with the IRS. Things happen, and sometimes payment schedules or reporting gets messed up.
A few years ago at this time, you could’ve been saying, “What is a 1099? What’s self-employment tax?”
And now you could be facing a potential IRS nightmare.
We’re experienced in helping businesses and individuals who are at risk of frozen accounts, out of control penalties and interest payments, and garnished wages. And we want to fight for you. We answer our phone 24 hours per day, and are always available for quick contact through e-mail, as well.
Get in touch with us today to find a silver lining!