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Regardless of how you earn income, you will still need proper tax forms. The two primary documents you focus on as a traditional employee are forms W-2 and W-4. Your W-4 determines your tax withholdings, while your W-2 shows how much income you received and how much you owe in taxes.
However, not everyone works directly for an employer. Self-employed individuals, freelancers, independent contractors, or others that receive income outside of a traditional employee relationship need to rely on IRS Form 1099. We will discuss what Form 1099 is, its use, and how to file it.
There are multiple types of Form 1099; however, they are all used for the same reason. Form 1099’s primary purpose is for taxpayers who receive income outside the traditional employer-employee relationship.
Like Form W-2, Form 1099 provides information to both the IRS and the taxpayer regarding their income for the fiscal year. Once the IRS receives this information, they can determine how much the individual owes in taxes.
Typically, the company or firm paying you sends you a Form 1099 following the end of the tax year. For example, a firm providing a freelance platform to connect customers with workers will send 1099 forms to those freelancers and the IRS to report income earned through that relationship. “Gig workers” typically fit this category, providing ride-sharing and food delivery services and design, programming, and other temporary project help.
Form 1099 provides income and tax information to the IRS regarding an individual’s income outside of a traditional W-2 employer. This type of income is from non-employment-related sources. In other words, it’s for those that receive payment other than a standard salary from an employer.
Form 1099 also allows you to report dividends from investments and interest from banks. Also, tax refunds from the state or local authority can go on Form 1099 for income. Essentially, Form 1099 handles all forms of income that are not part of a traditional salary.
If you want to avoid receiving an audit from the IRS, taxpayers need to report all sources and amounts of income.
If you earn less than $600 from non-employment-related sources, you are exempt from filing Form 1099. However, if you exceed that amount, you must report that income with Form 1099.
Although every type of Form 1099 serves the same income reporting purpose, there are different versions of the 1099 form for reporting different types of income. The two most common types are the following:
Other types include:
If you received ten or more dollars from any source of retirement income, you should receive Form 1099-R.
There are several more types of Form 1099, with each one representing a specific type of income. The main takeaway with Form 1099 is that if you receive any form of payment that is not traditional, you should report it.
Generally, taxpayers do not need to complete Form 1099 to report their income. Instead, taxpayers receive Form 1099 from their sources of income, which could be anything from a business to a financial institution. Similar to Form W-2, Form 1099 has a deadline of January 31st, which means that the taxpayer should get their copy by mid-February at the latest.
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