The freelancer's guide to 1099-MISC forms
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Taxes are important for freelancers to understand. As with most things freelance, you’ll have to do a little legwork with your taxes since you don’t have an employer handling everything. So let’s focus on the 1099-MISC – the bread and butter for freelancers and independent contractors.
1099s are a series of forms that the IRS refers to as "information returns." What kind of information? Well, since it’s the IRS, if you guessed "information about money," you’re on the right track. In this case, it’s specifically information about non-salary income you’ve earned.But 1099s don’t just cover compensation from work. When the IRS says non-salary income, they mean all non-salary income. There are more than twenty 1099 forms, and the Scrabble-like naming conventions can get confusing. Some common 1099 forms are:
1099-INT – If you have a savings account, you’ve probably seen a 1099-INT form. This shows the interest you’ve accrued from your savings over the year.
1099-DIV – Do you have stocks that paid dividends? Or maybe a mutual fund that distributed capital gains? Look at you, you savvy investor! Those payments get recorded on a 1099-DIV form.
1099-R – This form shows distributions from your retirement plan – pensions, IRAs, and other retirement plans.
A 1099-MISC form is used for miscellaneous income. This is going to be the most important 1099 for freelancers, because in this case miscellaneous income means what a client paid your for doing contract work. Think of a 1099-MISC as the freelancer version of a W-2 – the form you’d get from your employer if you were a salaried employee – with similar earnings information.
The main difference is what’s reported – or, in the case of a 1099-MISC, what’s not reported.If you were a salaried employee of a company, you’d get all of the benefits that comes with it. Sure, as a freelancer you get flexible hours, the chance to work with many different clients, and the opportunity to be your own boss, but salaried employees get taxes withheld without having to worry about it, so they have that going for them.As a self-employed worker, your client won’t withhold income taxes for you; form 1040-ES will help you figure out what you owe. You also still need to pay Social Security and Medicare taxes, which is why some freelancers complain about having their taxes "doubled." Again, it’s up to you to figure out what those are, so crunch those numbers using Schedule SE before you file your return.
Your client is required to send you a 1099-MISC form if he or she paid you $600 or more in the previous year. If the amount they paid you was less than $600, they don’t have to send you a form, but you still obviously have to report that income, so make sure you’re keeping track of everything. If there’s one thing the IRS hates, it’s when people underreport their earnings.
To keep it simple: you must report all income earned to the IRS. Even if a client doesn’t submit a 1099-MISC form, that doesn’t excuse you from reporting that income. A 1099-MISC is simply a record of payment that occurred. If you are audited and the IRS finds a sizeable amount of money in your bank account that you didn’t report, then "I didn’t get a 1099-MISC" won’t fly.
You’ll typically get your 1099-MISC in late January or early February, as they’re supposed to be sent to contractors by January 31st (and to the IRS by February 28th). There are penalties for parties who mail them out late, but that doesn’t mean it doesn’t happen, which can unfortunately leave you scrambling to finish your tax return if a client is dragging their feet. Again, if you already have an idea of how much you should be reporting, this will be less of an issue.
Because you got paid! It may seem like a bad thing any time you get a tax-related form, but this is good news. Did you get multiple 1099-MISC forms from different clients? Even better, because that means you have a lot of work coming in, and you’ll get individual 1099-MISCs from each client.
Like other 1099 forms, or even a W-2 for a salaried worker, you don’t technically do anything with a 1099-MISC. The form itself will arrive in your mailbox filled out, and it exists to report information that you include in your tax return. You’ll use the handily-numbered boxes to report your income on your tax return, and through the magic of IRS calculations the tax you owe will be determined.
The taxable amount from your 1099-MISCs isn’t an etched-in-stone number. As a freelancer, you have a lot of options to lower your taxable income through deductions. These tax breaks come from money you’ve spent on doing your job – things like buying equipment, traveling to meet clients, and having a home office. You’ll primarily report these expenses on a Schedule C form (yes, another form – but this one saves you money, so it’s totally worth it).By making these deductions you can considerably cut the amount that Uncle Sam will tax, and it may be the difference between growing your business and closing up shop.
Getting a copy of all of your 1099-MISC forms mailed straight to you saves you the headache of having to hunt forms down, and your clients will also send copies of the forms to the IRS. That means the IRS knows how much you should be reporting from the 1099-MISCs.Your 1099-MISC is tied to your Social Security number, so you won’t be fooling anyone by pretending it isn’t yours. Don’t be afraid to make deductions where you can, but always make sure you’re reporting the correct amount of income in the first place. The last thing you want is an audit and the time, money, and hassle that comes with one.
Always double check the 1099-MISC forms that you get from clients! You want to report the correct amounts to the IRS, and you want your clients to be reporting the correct amounts to you, too. Mistakes do happen, and you don’t want to be on the hook for a $50,000 payment when you actually got paid $5,000. A little mistake like that will put you into a very different tax bracket.If you get a form with an incorrect amount listed, let the client know right away. If you’re lucky, you can nip it in the bud before they mail a copy to the IRS.And if it has already been sent to the IRS? Well, that gets a little tougher. The IRS says if you can’t get in touch with the issuer, you should "attach an explanation to your tax return and report your income correctly." There’s no good way out of a wrong tax form, but on the bright side the IRS knows it happens and has a system in place to deal with it. Hopefully get it resolved with as little stress as possible.
So there it is: everything you need to get you started on your 1099-MISC forms. Not so daunting anymore, right? A tax professional is always just a phone call away if you need help, but even if you aren’t filing alone, knowing what’s happening with your money is never a bad thing.
By the way, if you're in the middle of building your own benefits package, we have a step-by-step guide here.
Image: JD Hancock
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