In the United States, the federal government relies primarily on taxes to generate revenue. While it can be confusing, every individual and business must file a yearly tax return detailing their income and any taxes owed. Depending on your situation, you may or may not be eligible to pay many different taxes. To file them, you’ll need to fill out the appropriate forms, or sometimes your payer will do it for you.
Therefore, it’s essential to understand all the forms you may come across when doing your taxes; one of those is 1099. This form is used for specific types of income that don’t come from an employer, such as interest or freelance work. If you don’t know how to process it, you could face some severe penalties from the IRS. Luckily, we’re here to help.
This blog post will discuss what Form 1099 is, its purpose, and who must file it. We’ll also explore how 1099 form processing works and offer methods for completing this process. Finally, we’ll provide a few reasons to consider working with a professional to help you understand and file your taxes correctly. Whether you’re an individual or a business taxpayer, keep reading to learn more.
What Is Form 1099, And What’s Its Purpose?
As we mentioned, 1099 is a tax form that lists all the income you received during the year that isn’t your salary. This type of income is also known as “non-employee compensation,” and taxpayers must report it to avoid an audit or penalties. Non-employee compensation can come from many sources, such as:
- Interest income from savings accounts or investments
- Rental income from property you own
- Unemployment benefits
- Retirement plan distributions
- Severance pay
- Awards and prizes
- Gambling or lottery winnings
The purpose of the 1099 form is to help the IRS keep track of non-employee compensation to ensure individuals pay the appropriate taxes. For this reason, the IRS considers it an “information return.” Since they also collect wage data from employers through Form W-2, the IRS can compare this information with the one in your Form 1040 (used for personal federal income tax returns). You’ll likely get a notice saying you owe additional taxes if they don’t match.
Who Must Fill Form 1099?
Individual taxpayers typically don’t need to fill out a Form 1099. Instead, payers (or the businesses or persons from whom you received income) must fill out and provide this form to anyone who earned more than $600 in non-employee compensation during the tax year. However, there are some situations where you must file it yourself. For example, if you’re self-employed or run a small business, you’ll need to file Form 1099.
Some payers may send 1099s electronically, while others will mail paper copies. The deadline for sending these forms to taxpayers is January 31. If you don’t receive your form by early February, reach out to the payer and ask them to send another copy. Otherwise, you’ll still be responsible for reporting this information on your taxes.
Types Of 1099 Forms
There are different types of Form 1099, each for reporting a specific type of income:
- 1099-NEC: Businesses must file a 1099-NEC when they pay a non-employee $600 or more for services (not products) during the tax year. A non-employee could be an independent contractor, freelancer, or consultant.
- 1099-INT: If a taxpayer earned more than $10 in interest during the tax year, they would receive a 1099-INT. Usually, brokerage houses and other investment companies will send a 1099-INT.
- 1099-DIV: Form 1099-DIV reports dividends and other distributions from stocks, mutual funds, and similar investments. The IRS considers dividends as taxable income, even if you reinvest them.
- 1099-G: Individuals who received unemployment benefits, certain government payments, or state tax refunds will get a 1099-G form. For example, you’ll need to report this amount on your federal return if you received a refund for overpaid taxes.
- 1099-R: Payers use Form 1099-R to report distributions from retirement plans like pensions, annuities, and IRAs. Importantly, keep in mind that not every distribution from a retirement account is taxable. If you took out a loan from your 401(k), you wouldn’t need to pay taxes on this amount.
- 1099-B: Brokerage firms use this form to report proceeds from the sale of stocks, bonds, and other investments. Some barter exchange transactions may also require a Form 1099-B.
- 1099-S: Taxpayers who sold real estate (like a house or land) during the year will receive this form. The payer may be a real estate agent, title company, closing attorney, etc., and they use it to report the proceeds from the sale.
- 1099-MISC: When the income source doesn’t fall into one of the other categories, payers use Form 1099-MISC. Examples of miscellaneous income include royalties, prizes, awards, etc.
How 1099 Form Processing Works
For business owners, 1099 form processing is the act of preparing, printing, and mailing 1099s to your contractors. Depending on the size of your business, you may be able to do this independently, or you may need to outsource it to a third-party provider. There are a few key steps in the form processing workflow:
Data Collection
The first step is collecting all the data you need to prepare Form 1099. The contractor’s name, address, Social Security number, and the amount you paid them during the year are all required information. You’ll also need your business information, like your EIN (Employer Identification Number) and contact information.
Printing And Mailing Or Sending Them Electronically
Once you have all the necessary information, you can print and mail the forms to your contractors. Remember to use first-class mail and send the documents by January 31. If you choose to do it electronically, you must get consent from the contractor first.
Filing With The IRS
After you’ve sent out all the forms, you’ll need to file Form 1099 with the IRS. Most taxpayers will have the same deadline of January 31 (or the next business day) to file, so sending both copies together is recommended. However, some may be able to file until February 15 or the end of February.
Methods For 1099 Processing
The best 1099 form processing method for your business will depend on the number of forms you need to file, your budget, and your in-house resources.
Print And Mail
Printing and mailing may be the best option for businesses that only need to file a few forms. You can use software to fill out the form template and print them on regular paper. Then, stuff them in envelopes with first-class stamps and send them off. The main downside of this method is that it’s time-consuming, and there’s a greater chance of error.
E-File
E-filing is filing Form 1099 electronically with the IRS. You can e-file through the IRS website or with a third-party provider. The main benefit of e-filing is that it’s faster and more accurate than mailing in paper forms. You’ll also get confirmation from the IRS when they receive your filing.
Outsource
If you don’t have the time or resources to file Form 1099 on your own, you can outsource the process to a third-party provider. This option is generally more expensive than other methods, but it’s also the safest. You won’t have to worry about meeting deadlines or dealing with errors.
Do You Have To Pay Taxes On Your 1099 Forms?
The income reported on Form 1099 is taxable, but many exceptions and rules apply. For instance, the IRA loan mentioned before that allows you to borrow money from your retirement account without paying taxes on the withdrawal. Or, for estate, the first $250,000 of income is typically tax-free. It’s important to understand the rules that apply to your situation, so you don’t end up paying more taxes than you owe.
One thing to note is that individual taxpayers must report all their income, even when they don’t receive a Form 1099. Be careful not to overlook any income sources when preparing your taxes. Sending the 1099s isn’t required when filing taxes because the IRS previously gets them from the payer.
Work With A Local Professional For Your 1099 Tax Processing
While you don’t require a professional to prepare your taxes, working with one can save you time and guarantee accuracy. A tax advisor will know all the rules and regulations surrounding Form 1099 and determine which applies to your situation. They can also explain how the form will impact your taxes and what you can do to minimize your tax liability.
Regarding taxes, it’s always better to be safe than sorry. Working with a professional is a wise investment considering the potential costs of filing your taxes incorrectly. A tax advisor can help you save money and stay compliant by preventing errors.
Nesso Tax – Helping You Navigate The Complexities Of The Tax System
At Nesso Tax, we offer a wide range of tax services, including Form 1099 processing. We’ll gather all the necessary information to file your forms and ensure they’re submitted correctly and on time. We understand the complexities of the tax system and are here to help you navigate them. Our professionals can assist you in everything from preparing your taxes to planning for the future.
In addition to being reliable and knowledgeable tax professionals, we’re also part of the Nesso Group. We provide integrated, in-house insurance and financial solutions such as tax, accounting, wealth management, and more. We aim to give our clients all they require to succeed, so we’re always available to them with a positive attitude.
