In addition to Form 1040, another Form 1099 is filed to report your non-salaried income. It is similar to Form W-2 (filed by your employer) but Form 1099 is applicable to those who are self-employed, freelancers or work on a contractual basis. It is submitted by your client or to whomsoever you have rendered your services. Form 1099 also applies to income from private companies, organizations, personnel, banks or the Government. In other words, it can be said that anybody who puts money in your pocket is accountable for it and also has to submit Form 1099 justifying the reason for the transaction.
- Form 1099 is submitted by the payer if the total transactions exceed $600 in a financial year. The payer has to submit two copies of Form 1099, One copy to the IRS and another to the beneficiary.
- Form 1099 contains your SSN( Social Security Number) and TIN(Tax Identification Number) filled on it. It ensures that the IRS(Internal Revenue Services) knows about the transaction and stays in the loop. Any income you file on the Form 1040 is then cross-checked with the Form 1099 filed to the IRS by the payer.
- Receiving Form 1099 does not entitle you to outrightly pay the taxes on the amount. The amount gets added to your annual income and then calculated for your due income tax.
For people who are regular employees and also have side incomes, they have to file Form 1099 along with their Form W-2 showcasing their side income.
There are 20 different types of Form 1099. Most transactions have a particular form associated with the type of income.
MOST COMMONLY USED 1099 FORMS ARE:
FORM 1099- MISC(MISCELLANEOUS INCOME)
Form 1099-Miscellaneous is one of the most used forms. It covers incomes from a broad-spectrum of sources. For the financial year 2019, any income to the freelancer/self-employed person or from a side job will be reported in Form 1099-misc by the payer. For the financial year 2020, such transactions will be reported on the new Form 1099-NEC(discussed later).
Form 1099 is filed for transactions that include :
- Rental income
- Agricultural transactions
- Fishing transactions
- Payments made to an attorney/architect etc (only applicable for 2019)
- Any other income for which no specific form is available.
The new Form 1099-NEC(Nonemployee Compensation)– The filing of the new form 1099-NEC will commence from 2021. All the nonemployer transactions for the financial year 2020 will be reported on Form 1099-NEC. The income to self-employed professionals/ to those who work on a contractual basis or have a side income will be reported on this form i.e. It will be an exclusive form of non-employee payments. Form 1099-NEC also includes the following payments:
- Payment to someone who is not an employee
- Payment to a person who has rendered his/her services
- Payments to an individual, partner, estate, or in some cases payments to a corporation.
- Fees to professionals like an accountant, an architect, attorneys, etc.
- Fees paid by a professional to the other professional, in other words, fee splitting
- Commission paid to non-employees.
- The minimum threshold fixed by the IRS for a financial is $600.
Note: Do not include personal payments.
Form 1099-INT(Interest Income)- This is another most common Form-1099 and it is to be filed for the money paid as interest.
It is often submitted by the banks, mutual funds and other financial institutions against the interest they pay you for the savings account, etc.
- For any interest earnings in a year exceeding $10, form 1099-int has to be filed.
- For business debts interest the threshold increases to $600.
Form 1099-DIV(Dividends and Distributions): This is also amongst the most common forms. The form is sent to the investors who have earned income from distributions on their investments. It is filed for the dividend and other distributions received by you. Form 1099-DIV is commonly filed for incomes from stock or mutual funds. The minimum threshold is $10. In case if the company or the organization is liquidating then the limit extends to $600.
Form 1099-R(Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.): The amount that is diverted to retirement plans falls under the category of deductible income and the taxes for the same are not paid. When you receive distributions from the retirement plans, pension schemes, etc., it is counted as income by the IRS and therefore, you receive form 1099-R for such earnings.
- Even the loans from retirement plans are counted as income and thus you receive 1099-R for loans too.
- 1099-R is filed for payments received from insurance contracts etc.
- The minimum threshold for filing Form 1099-R is $10.
Form 1099-K(Merchant Card and Third Party Network Payments): “Payment Card and Third Party Network Transactions”. This form is useful for Online retailers i.e. for those who receive payments through debit cards, credit cards or through third party processors(if the amount exceeds $20,000). Form 1099-K is also applicable if you have more than 200 individual transactions. For example, AIRBNB’s hosts who have a hot selling property easily exceeds the threshold and thus are entitled to file Form 1099-K. This form is also applicable to ride-sharing drivers/to those who run crowdfunding campaigns and qualifies for more than 200 transactions and receive more than $20,000.
OTHER FORMS THAT ARE SELECTIVELY USED
FORM 1099-A(Acquisition or Abandonment of Secured Property): This form is received when the mortgage lender forecloses your property. It is mandatory to report any foreclosures to the IRS. The Form 1099-A is submitted by the mortgage lender both to the IRS and the property owner.
NOTE: There is no threshold for this form.
Form 1099-B(Proceeds From Broker and Barter Exchange Transactions): This form is for those who deal in securities and stocks and have revenues from the same. Form 1099-B reports the income from the sale of securities, stocks or even barter exchanges. You usually receive this 1099-R from a broker.
Form 1099-C(Cancellation of Debt): This form is to report the cancellation of the debt. To understand this let’s take an example. Assuming that you have a credit card debt of $15,000 and with the negotiations from the credit card company, it is settled for $10,000, meaning that the lender canceled the debt of $5000 on you. The forgiven amount is counted as income by the IRS and thus Form 1099-C is submitted by the lender.
Form 1099-G( Certain Government Payments): This form is reported if you have remittances from the local, state or federal governments. It includes Credits, refunds or offset. This form is also applicable in case you receive unemployment compensation.
- The minimum amount required to report Form 1099-G is $10.
- It does not include social security benefits.
FORM 1099-LTC(Long-Term Care and Accelerated Death Benefits):
If you receive payments from long term insurance benefits, 1099-LTC is a must. It is also applicable to the payments from life insurance policies.
FORM 1099-OID(Original Issue Discount): It comes into the role when you buy bonds, notes or other financial products at a discounted rate to the face value or redemption value at maturity. The maturity period should be at least exceeding a year.
FORM 1099-PATR- (The patronage dividend). This form is filed when you receive an amount exceeding $10 from distributions from the cooperative organization. It is paid to the investor based on the profits that are earned by the organization.
FORM 1099-Q(Payments From Qualified Education Programs (Under Sections 529 and 530)- This form is filed when you receive payments from a child education program. If you have saved a good amount of money in your child education program and you withdraw some amount from it you get a Form 1099-Q, showing it as an income. Remember the amount you receive from the child savings plan is not taxable when it is spent on education.
Form 1099-S(Proceeds From Real Estate Transactions): This is the form that deals particularly with the sale of a property. The form is submitted by the person who is responsible for closing your real estate transaction. If you sell the property, then you have to fill the form. You may or may not be taxed depending on the net profits.
FORM 1099-SA(Distributions From an HSA, Archer MSA, or Medicare Advantage MSA): This is to be filed if you receive any payments from a health savings account, an archer medical savings account or medicare advantage on your federal taxes.
FORM RRB-1099(RAIL-ROAD BENEFIT)– payments from RailRoad Retirement Benefits Plan are reported on this form.
FORM SSA-1099(SOCIAL SECURITY BENEFIT STATEMENT): Form 1099 is to report the payments received as social security benefits.
FORM 1099-CAP(Changes in Corporate Control and Capital Structure): This form is reported for non-employee payments and transactions. It is issued to the shareholders of corporations who receive cash, stock, or property when the corporation is acquired or underwent a change in the capital structure.
FORM 1099-H(Health Coverage Tax Credit Advance Payments): This form is to report qualified health insurance advance payments that were made on your behalf or on behalf of qualifying family members.
The employees have an advantage that a part of their taxes is withheld and submitted to the IRS by the employer, so at the year-end, they have very little to pay or can even claim a refund if overpaid. For the self-employed individuals, It is suggested to regularly pay a small part of taxes throughout the financial year to the IRS, so that in the end you do not have a high tax liability or if you overpaid you can claim a refund.