What is form 1099 and how to fill it out?

If you are starting to work as a freelancer, or if your company is hiring external help, you have probably heard of the 1099 form. But, What exactly? And how is it filled? Next, we will answer these questions and much more. But first let’s start at the beginning. Sometime in February, you may receive a 1099 tax form (or more than one) in the mail. You need to save it, because it can have a big impact on your tax life.

What is form 1099? It’s for taxes, isn’t it?

The 1099 form is a record that an entity or person (not your employer) has made payments to you. Generally, the entity or person that has made the payments has to generate a 1099 form and send copies to both you and the Internal Revenue Service (IRSo Internal Revenue Service). Now, there are several types of 1099 form.

The 1099-MISC and 1099-INT forms are the most common, but there are others (see list below).

You can receive a 1099 form for different reasons: For example, from your bank because it has paid you the interest on your savings; from the financial institution where you have your Individual Retirement Account (IRA or Individual Retirement Account), in the event that the former has issued a check from the latter; or from the government of the state where you live, because they have sent you a tax refund.

Freelancers, self-employed or self-employed, often receive 1099 forms from their clients, as they reflect the income they have received. If you are a freelancer, it is recommended that you check some tax deductions that could be applied to part of this income.

Whatever the case, a 1099 form will have your social security number or taxpayer identification number on it, which means the IRS will know you received money, and that you will be aware if you do not report this income on your tax return.

Just because you receive a 1099 form doesn’t necessarily mean you have to pay taxes on that money. You can have deductions that offset income, for example, or that part or all of it is protected based on the characteristics of the asset that generated it. In any case, do not forget that the IRS is aware of the capital you handle thanks to the 1099 form.

What do I do with a 1099 tax form?

Basically, the 1099 form is used to calculate the income you received during the year and what type of income it was. Now, depending on the latter, you will declare that income in different places on your tax return.

How many types of 1099 forms are there?

There are various types of shapes 1099, which is why, below, we present a basic summary of the most common. If you want to know in more detail about each one, consult the Internal Revenue Service website.

1099-A

You can receive a 1099-A form if your mortgage lender paid off some or all of the debt, or if you were involved in a short sale of real estate. Why? Well, because canceled debt is income in the eyes of the IRS, and is generally taxable.

1099-B

Form 1099-B covers proceeds from the sale of various types of securities, as well as some types of transactions that take place through barter exchanges, typically websites.. In this case, you may receive a 1099-B form; although a 1099 is generally not required if you are bartering with someone directly. However, you may still need to report the income.

1099-C

If you somehow managed to get a credit card issuer or lender to settle the debt for less than what was owed, you may receive a 1099-C form. After all, the amount that the lender forgives can be considered taxable income.

1099-CAP

You can receive a 1099-CAP form if you own stock in a corporation that was acquired or underwent a major change in its capital structure and, as a result, you obtained gains such as cash, stocks, or any other property/equity.

1099-DIV

This is one of the most common, and you receive them for any type of dividends or profits that you have received, except those obtained in your share account in a credit union. However, the IRS also takes into account those interests, and they appear in another form: the 1099-INT.

1099-G

If you received money from the state, local, or federal government (including a tax refund, credit, or offset), you may also receive a 1099-G form. And not only that, but if you were unemployed for a year, you could also receive one.

1099-INT

If you earned more than $10 in interest from a bank, brokerage or other financial institution, you will receive a 1099-INT form. To learn more about what to do with this form, visit the Internal Revenue Service website.

1099-LTC

If you received payments from your health insurance, the insurer may file a 1099-LTC form. On the other hand, if you received accelerated death benefit payments from a life insurance policy, these will also be reported on the 1099-LTC form.

1099-MISC

This form covers a set of income that doesn’t fit into other 1099 categories, although it does have some specific goals, like income from prizes and awards, for example.

1099-NEC

In 2020, the Internal Revenue Service wants organizations to use a new form, the 1099-NEC, to report money they paid to people who worked for them but weren’t employees. In other words, if you’re self-employed, self-employed, or have a side job, your clients will need to send you a 1099-NEC instead of a 1099-MISC in early 2021.

1099-OID

You may receive a 1099-OID form if you have purchased bonds, notes, or other financial instruments at a discount to face value or surrender value at maturity. Generally, the financial instrument must have a maturity of more than one year.

1099-A

If you are part of a cooperative and received at least $10 in patronage dividends, you will likely receive a 1099-PATR form.

1099-Q

This form is focused on any principal saved in a 529 account, so if you’ve been saving money for your child’s college tuition, look forward to receiving this form. Keep in mind, however, that earnings in a 529 plan are generally not taxable when used for “qualified” education expenses, so for many people the 1099-Q is nothing more than a record.

1099-R

If you have received money from a pension, retirement plan, profit-sharing program, IRA, or annuity, you may receive a 1099-R form. Keep in mind, however, that many retirement plans are tax-advantaged, so this form may be a simple filing on behalf of the IRS. On the other hand, if you’ve taken a loan out of your retirement plan, you may have to treat it as a distribution, which means it can show up on this form as well, just like permanent and total disability payments under the life insurance contracts.

1099-S

This form is intended to cover gains from purchases or exchanges of real estate, so the person responsible for closing these transactions will provide it to you. However, the gains from the sale of your house or other real estate are not necessarily taxable, so it is good that you inform yourself in more detail about it.

1099-SA

You will receive this form if you took any distributions from your Health Savings Account, Archer Medical Savings Account, or Medicare Advantage. You should be aware that HSA and Archer distributions are generally not taxable if you use them to pay for qualified health expenses. So again, for many people a 1099-SA is simply proof that the money left the account and ended up in your hands.

Who receives a 1099 form?

Basically all contractors/independent workers who have earned more than $600.

Who should fill out the 1099 form?

If you own a business and they hired an independent contractor/worker and paid them more than $600 in a tax year, then you are responsible for issuing a 1099. In other words, the payer fills out the form.

Keep reading: What happens if I do not pay the taxes?

$600 limit

If you paid a contractor/independent worker less than $600 over the course of the tax year, you do not need to file a 1099 for them.

Now, if you’re an independent contractor/worker, keep in mind that you still have to report all of your income, even if you earned less than $600 on a specific job and your client never sent you a 1099.

How do you fill out a 1099 form?

Basically, the 1099 form comes in two copies: Copy A and Copy B.

If you are an employer/company and have contracted the services of an independent contractor/worker, you must report what you paid on Copy A, which, later, report to the Internal Revenue Service (IRS). Now, for Copy B, you put the same information on it, but you send it to the contractor/worker.

If you are a contractor or self-employed person and you receive a 1099 form (it will obviously be a Copy B), you do not need to send it to the IRS. What you have to do is report the income listed there on your individual tax return.

Step #1: Gather all the necessary information

If you are an employer/company, before you complete and file a 1099, you will need to have the following information on hand for each contractor/worker:

  • your legal name
  • Your adress
  • The total amount you paid him during the tax year
  • Your taxpayer identification number (probably your social security number, unless you are a nonresident or resident alien)

The standard way to acquire this information is to have each contractor/worker fill out a W-9 form. Therefore, we recommend that you have a W-9 on file for each of them. In fact, having a W-9 filled out should be one of the first administrative tasks you do after retaining the services of an agent outside of your company.

On the other hand, review your accounting records to confirm the total amounts you paid each contractor/independent worker during the tax year. Once you have all the required information, use it to fill out the 1099 form.

Step #2: Send Copy A to the Internal Revenue Service

Form 1099 Copy A must have been filed with the IRS by January 31, 2020, regardless of whether it is filed electronically or by mail.

When you file a physical 1099 form, you obviously cannot download and file a paper version of Copy A from the IRS website. Instead, you must obtain a physical 1099 form, fill out Copy A, and mail it to the IRS.

Step #3: Send Copy B to the contractor/independent worker

Once you have completed the 1099 form, send Copy B to all of your independent contractors no later than January 31, 2020.

Step #4: Fill out and file the 1096 form

If you do the entire paper 1099 process, you must also complete and submit a 1096 form, which the IRS uses to keep track of each physical 1099 form. However, the deadline to submit the 1096 form this year was January 31.

Step #5: Check if you need to file 1099 forms with your state

Depending on where your business is located, you may need to file 1099 forms with the state. Because, We recommend that you check with a CPA to ensure you meet the 1099 filing requirements for your jurisdiction.

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