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Tax season is coming up real soon, so it's time to get ready! One tax issue that challenges businesses and taxpayers alike these days is the IRS 1099 form. People are often confused about 1099s, not knowing what the form represents and how they're supposed to use it. With over 57 million Americans now freelancing in some form or another, 1099s are becoming a bigger part of accounting for income.
Failing to deal with 1099s effectively can cause you to pay more when you file your taxes; the IRS can also penalize you for failing to account for your 1099s. Therefore, as you prepare to file your Federal income taxes this year, here's what you need to know about 1099s.
What's a 1099?
A 1099 is an Internal Revenue Service form used to record payments to individuals who are not employees on payroll. In general, any business or individual that receives services valued at $600 or more from someone it does not have on payroll is supposed to issue that person a 1099; the IRS receives a copy of the 1099 as well. The 1099 includes a tax identification number of the individual who receives it. When that person eventually files a Federal income tax return, the IRS will have the matched 1099 and will use it to ensure that all of that person's income is accounted for.
There are many different types of 1099s issued. Freelancers and contractors often receive the 1099-MISC, used to report income paid to individuals who are not on payroll. People who own stocks or mutual funds may receive a 1099-DIV; this 1099 is applicable whenever a security such as stock issues a dividend, then considered income.
Contractors who provide work to the Federal Government normally receive a 1099-G to account for their income. Withdrawing money from a tax-deferred retirement account frequently triggers a 1099 as well, since that withdrawal is taxable income.
Another place individuals may encounter 1099s is through debt settlement. More and more Americans are choosing to enlist the services of debt settlement companies, which work with lenders to help address a borrower's outstanding debt. Creditors that agree to new debt terms often issue the borrower a 1099 form, since reduced, forgiven, or canceled debt is a form of income.
There are several other types of 1099 forms as well, although the aforementioned 1099s are the ones taxpayers most frequently encounter.
Where can you get your 1099?
Businesses are required to send out 1099s by January 31 for any services rendered in the prior year. Most individuals will receive their 1099s in early February. However, not every business completes its tax paperwork the way it should, so 1099s can end up going out much later; it's not uncommon to receive a 1099 after you've filed your income taxes.
Many financial experts advise individuals not to reach out to businesses searching for 1099s, even when they appear to be late. These experts warn that 1099s often get lost within the system or in mail routing, and requesting a copy can inadvertently cause the business to issue a duplicate 1099 to a taxpayer; this will cause a headache later on when that individual attempts to account for not one, but two 1099s with the IRS.
Instead of trying to track down 1099s with past clients, keep good records. If you're a freelancer or contractor, keep track of the income you've received for services you've provided to businesses, and be prepared to report it even without a 1099 in your tax return. That way, if the 1099 is eventually issued much later, you'll have already accounted for the income.
Dealing with 1099s
The most important thing to remember about 1099s is that the IRS gets them and matches them electronically, using your tax identification number. The IRS will track down any income reported on a 1099, so don't ignore or fail to report them. If you fail to account for a 1099 in your tax return, the IRS will normally send you a bill for the amount you owe, occasionally with a penalty attached for failing to file it in your return; if the amount is correct, ensure you pay it promptly.
Open your 1099s as soon as you receive them, and ensure you check them all closely. Businesses are not perfect; sometimes, they'll make mistakes that can cost you more money when you go to file your taxes. If you catch an error, inform the business immediately. There may be time to fix the error and issue you a new 1099 with the correct information in it. You also want to ensure that the issuer has time to contact the IRS and report the error, so you have less of a hassle when it comes time to file your personal income taxes.
Dealing with 1099s is not fun, but it's a necessity. As more and more Americans freelance, pursue side hustles or settle their debts, they're finding 1099 forms in their mail and inboxes when February rolls around. Dealing with these forms is an important part of tax preparation and accounting for income.
Whenever you receive a 1099, open it right away and ensure the information is correct. You should also have a trusted tax professional review the form as well, and help you integrate its data into your overall tax return. Doing so will help make your tax preparation a little less painful this spring.