If you go from working a full-time job for a traditional employer to working for yourself as a freelancer, you may be surprised to find that you can’t file taxes the way you did before. If you earn money for the services you provide as an independent contractor, you need to report this income differently than you reported your income from a job where you were an employee. The client who pays you doesn’t withhold taxes the way a regular employer does, and the way you need to file your taxes is different than how a taxpayer files with only a W-2. You may find that Form 1099-MISC becomes a necessary part of your tax filing process.
Form 1099-MISC is used to report income that’s not a wage, tip or salary. It can be used for a wide variety of non-employee earnings. Self-employed individuals receive the most common 1099-MISC payments. If you provide services to a business but are not considered an employee of that company, you are typically viewed as self-employed. According to the Internal Revenue Service, you are self-employed if you are a member of a partnership that carries on a business or trade, if you carry on a business or trade as a sole proprietor or independent contractor or if you are otherwise in business for yourself. You can even have a part-time business and be considered a self-employed taxpayer.
File a W-9 Form
If you’re self-employed, you’ll need to complete a W-9 form. Independent contractors and freelancers most often use the W-9. A completed W-9 form includes the name, Social Security number or tax ID number, business structure and signature of the person who is earning the income. If you are a contract worker, you will be required to fill out the form and give the completed form to your client. If you’re an employer who works with independent contractors, ensure that workers download and complete the W-9 form. Employers will use the information from the W-9 form to complete 1099-MISC forms for each contractor at the end of the tax year. It’s necessary for you to keep the W-9 form on record. However, only send it to the IRS if it’s requested.
Reporting 1099-MISC Income as Payee
You should receive the 1099-MISC by the end of January if you earned self-employment income. The 1099-MISC is sent from an individual or company for non-employee compensation. The IRS considers self-employed earnings to be business income, and that income must be reported on Schedule C. However, keep in mind that the payer is not required to send you 1099-MISC if they paid you under a certain amount, yet that income is still taxable and must be reported on your end.
Find your gross income from your work in Box 7 of the 1099-MISC. You can typically then utilize Schedule C to deduct necessary business expenses. Any tools, supplies and operating costs are often deductible. Then, the net profit can be determined after your expenses have been deducted. The net profit is your taxable income. If that net profit is greater than $400, use IRS Schedule SE to calculate self-employment tax. If it is less than $400, you may not have to pay the self-employment tax, but you will still need to pay other taxes on it.
Reporting 1099-MISC Income as Business
If you hire certain workers like nannies or landscapers, you may be required to issue a 1099-MISC to each person you’ve hired. While you’re not responsible for withholding taxes for these workers, the IRS may penalize you if you fail to issue the 1099-MISC form.
Complete and file Form 1099-MISC, Miscellaneous Income, for every person who you have paid at least $600 for services during the year who is not your employee. File this form for each service provider who you withheld federal income tax from under the backup withholding rules. You may also file Form 1099 to report direct sales of at least $5,000 of consumer products to a buyer who aims to resell it outside of a permanent retail establishment. If you paid at least $10 in royalties or broker payments instead of dividends or tax-exempt interest, you would file this form. Also, if you paid at least $600 in crop insurance proceeds, prizes and awards or payment to an attorney, you can file. Personal payments are not reportable.
If you send in the 1099 forms late or just don’t send them at all, you may be penalized $100 per unfiled 1099-MISC, up to a $1million for the year. When sending the 1099-MISC to the IRS, attach Form 1096 and mail it to the address given on the form. Since these forms utilize a specific magnetic ink, you cannot send in forms downloaded from the IRS website. However, it’s easy to order the forms from the IRS website for free, or you may opt to buy them from office supply shops.
Exceptions to Reporting 1099-MISC Income
Some payments do not need to be reported on Form 1099-MISC, although they very well may be taxable. Payments for storage, merchandise and telegrams need not be reported. Wages paid to employees should not be reported on 1099-MISC; they should instead be reported on Form W-2, Wage and Tax Statement. Military differential wage payments made to employees on active duty and business travel expenses for employees shouldn’t be included. Neither should the costs of life insurance protection or any scholarships or fellowship grants. Canceled debt should also not be reported on Form 1099-MISC. Other exceptions also apply.
1099-MISC Instructions for Businesses
Form 1099 should be filled out carefully. Report each payment in the right box because the IRS will use the information you provide to determine whether the recipients have properly reported the payment. Also, be sure to get paper versions from the IRS. You can order approved forms directly from the IRS.
First, gather all the relevant details you’ll need about your business. Fill in the payer’s name, street address, city, state, country, zip code and phone number. Next, fill in your business’s tax identification number. If you don’t have one and have a sole proprietorship, simply put your Social Security number there. On the other hand, if you have a different business structure, you may have a unique tax ID number (TIN). You’d then need to fill in the recipient’s information and identification number in the spaces provided. This information should have been gathered through the W-9. Provide an account number for the recipient. Notice the box that says “2nd TIN not”. You only need to worry about that if a recipient is providing incorrect tax identification information.
Now, look at the numbered boxes on the form. You won’t have to fill them all out, but you will need to complete many. If you paid $600 or more to rent office space or for land rental, enter the amount you paid here. Box 2 is for reporting any gross royalties you paid over $10 to the recipient. In Box 3, report other income that isn’t specified by the other boxes. In Box 4, report the amount of money your business withheld from a worker who is subject to backup withholding. As you go from box-to-box, read the requested information, then enter it directly on the form.
If you get confused by Box 13, which is about excess golden parachute payments, that’s a common mistake – it refers to an agreement between an employee and a company that offers the employee specified benefits if employment is terminated. Go on to fill out Box 14 which is gross proceeds paid to your attorney if your business paid $600 or more to an attorney for legal services.
Consider Box 15a: Section 409A Deferrals. Filling it out is optional. Enter the total amount deferred during the tax year of at least $600 for the recipient under all nonqualified plans. In Box 15b: Section 409A income, enter all the amounts deferred that can be included in income under section 409A because the NQDC plan doesn’t satisfy the requirements of section 409A. Do not include amounts for money that was reported on a Form 1099-MISC, corrected Form 1099-MISC, Form W-2 or Form W-2c for a prior year. Next, if your company participates in a combined federal/state filing program, complete these boxes.
If you need help filling out any aspect of the 1099-MISC Income, the IRS website offers detailed instructions. Once you complete the 1099-MISC forms for self-employed contractors and other nonemployee workers, mail the form. Provide Copy B to the recipient by January 31, 2019. If you are reporting payments in Box 8 or 14, you have an extended due date of February 15, 2019. File Copy A to the IRS by January 31, 2019, if you are utilizing Box 7 about payments.
One of the common mistakes people make when receiving the 1099-MISC form is to assume that everything’s taken care of with their taxes. Since the form looks formal and complete, they may think that is the documentation of their earnings that year from the IRS. It's not an issue for those who are experienced with filing their taxes as an independent contractor or private business owner, but many people who are new to filing their taxes in a new way make mistakes. Consequently, it’s important to know that receiving the 1099-MISC is just the beginning of your responsibility for filing taxes on the income it reports.
The 1099-MISC form is not all that different from a W-2 form, which is the tax form that employees use to file their taxes every year. Like the 1099-MISC form, the W-2 form is sent by a company to both the payee and the IRS at the end of the tax year. However, the W-2 form also shows the amount of taxes that were already deducted by the employer for that year. The 1099-MISC does not show any amount of taxes that were deducted. A lot of people consult tax specialists to make sure that their W-2 is filled out correctly to maximize their potential deductions and help ensure they owe as little money in taxes as legally allowed.
An independent contractor may have been responsible for making quarterly payments to the IRS throughout the tax year. However, that is still not reported on the 1099-MISC. That is the part that can be confusing to those who are switching from being an employee at a traditional job to being self-employed, which doesn’t withhold taxes.
To ensure that you can cover any tax responsibilities you may still have at the end of the year when you receive the 1099-MISC form and file your taxes, try to save money throughout the year for possible payments on your taxes. It’s important to see an accountant who has experience in helping taxpayers in your situation to ensure that you are reporting and paying your taxes correctly. Having both a savings account for taxes and an emergency fund is essential for your financial health. Too many independent contractors end up owing a lot of money in taxes at the end of the year that they cannot pay upfront. Saving money and relying on the expertise of an accountant can help you avoid that position.
- IRS: Instructions for Form 1099-MISC (2018)
- IRS: About Form 1099-MISC, Miscellaneous Income
- IRS: Self-Employed Individuals Tax Center
- IRS: 1099-MISC
- Forbes: How To Read And Understand Your Form W-2 At Tax Time
- Upgraded Points: How to Build and Start an Emergency Fund
- Kiplinger: Ways to Save on Taxes
- Missouri Department of Revenue: Filing Miscellaneous Income
- Entrepreneur: 1099 Rules That Can Make or Break You This Year
Robin Raven is an experienced journalist and author. She has a BFA in writing from the School of Visual Arts and loves to write about personal finance. She has contributed to USAToday.com, The Huffington Post, The Nest, Grok Nation, and many other publications.