Once upon a time, there was a college student who worked part-time while attending school. As the new year rolled around, she sat down to file her taxes. She used the standard Form 1040EZ like she always did. But this year, she had received a Form 1099-MISC from the school for a project she had done with the student body association. Not finding anyplace on the 1040EZ form for this information, she ignored it. Two years later, a thick envelope arrived in the mail from the IRS. Ignoring that $600 on the 1099 would cost her more than $1000 in penalties and interest.
That was an extremely costly mistake for that poor college student. But it’s not limited to college students just starting out in their work experience. Many business owners and individuals have questions on 1099s. We urge all our clients to come to us for answers to those questions. However, in the meantime, here are a few things to consider as you navigate your 1099s this tax season:
What the IRS considers “income” goes beyond what is listed on Form W-2 issued by employers. If you are an independent contractor or business owner, 1099s may not be new to you. But if they are, let’s go through the basics. To begin with, there are multiple 1099 forms that are issued for various reasons:
- 1099-INT: For interest earned in bank accounts
- 1099-DIV: For dividends earned on investments
- 1099-G: For state and local tax refunds (yes, that is considered income)
- 1099-R: For pensions
- 1099-S: For the sale or exchange of real estate
- 1099-MISC: For miscellaneous income (compensation paid to non-employees or independent contractors)
Both businesses and individuals can experience pitfalls when issuing (or failing to issue) a 1099, and claiming those payments on a return.
Here are a few situations where a 1099 is warranted, and how to avoid common errors:
Employee vs. Independent Contractor: The IRS rules for tax payments and filings are different for employees and independent contractors. Employees receive a W-2 and the employer is responsible for tax withholdings. Independent contractors receive a 1099, and are required to make their own tax payments, including self-employment taxes. You must determine the category for household employees (babysitters, housekeepers, private nurses, gardeners, etc.) so you can provide correct tax forms for accurate tax payments.
Giving a 1099: Businesses use 1099-MISC to notify the IRS about business services they purchase. This form must be issued for all payments that exceed $600 over the course of the year. In most cases, these payments go to independent contractors, however, payments to an LLC also require a 1099.
NOTE: Starting in 2017, the IRS has changed the filing deadlines for issuing 1099s. ALL forms are now due to payees no later than January 31.
Receiving a 1099: The IRS receives a copy of all 1099s. If your return fails to include a 1099 in the IRS system with your tax ID number, it triggers a review. However, the IRS only cares when the claimed income is LESS than what they have noted. If you do work and do not receive a 1099, you should still claim that money. Reporting extra income does not trouble the IRS.
Rent Paid: Businesses that rent their office or workspace must issue a 1099-MISC to the individual or company that receives those rent payments. However, there are exceptions if the rent payments are made to a corporation or a real estate agent.
Lawsuit Settlement: If you received a payment from a lawsuit settlement, that money is considered income and must be claimed. Again, the tax ramifications of these payments can become complicated, as there are exceptions for physical injuries.