Form 1099 Basics

May 14, 2019

Form 1099 is one of the most common forms in our tax and accounting systems, both of which focus on keeping track of money. In fact, all of the forms, schedules, rules and other aspects of accounting and tax further this goal. If a taxpayer doesn’t file the correct tax form, then the IRS won’t be able to adequately keep track of his or her income. And this means that the IRS won’t be able to properly assess tax liability. W2s, W4s, 1099s, Schedule A, Schedule D – all of these things help better assess liability.

One of the main reasons why CPAs and tax attorneys are so useful is because they are conversant with these many different tax forms. Laypersons can quickly get a headache by attempting to navigate all of these complex forms by themselves.

In this post, we will go over the basics of Form 1099. There are actually several variations of Form 1099 – these variations reflect different sources of income. Form 1099 is the form freelance workers receive to reflect money paid to them. This is something we will explore in detail. Reporting income via a 1099 is fairly straightforward. Nearly every person can understand the purpose of Form 1099, but those who wish to save money should invest in a competent tax professional. 

Form 1099 is for Freelance Workers 

At its most basic level, Form 1099 records and reports income to the IRS. The income reported on Form 1099 never derives from an employer. Income on 1099 can derive from a wide variety of sources, but this doesn’t include income flowing from an employer to an employee. Form 1099 is the main form utilized by freelance workers or independent contractors.

Let’s look at a simple example. Many times, a real estate brokerage will engage the services of a broker on an independent contractor basis. The broker isn’t paid a salary, but only receives a commissioner for sales brokered. At the end of the tax year, the brokerage issues a Form 1099 to the broker and to the IRS The Form 1099 reports the commissions. This is how this income is tracked even though the broker isn’t technically an employee of the brokerage. 

Independent contractors have their own tax schedule. This schedule is not the same schedule followed by traditional employees. This is one reason why many well-paid independent contractors hire CPAs. CPAs can keep up with deadlines and take advantage of the tax deductions which may be available.  

Form 1099 will include the taxpayer’s social security number or tax identification number, depending on the situation. It will also report the exact amount that the taxpayer received during the tax year. What’s more, it will include the identity of the entity or individual who paid the income. Form 1099s are issued at the end of the year, but independent contractors typically pay taxes on a quarterly basis. In the future, we may come back and discuss the topic of estimated quarterly taxes in more detail. For now, the key things to remember are that 1099s report income from non-employees and contain critical information which is needed by the IRS. 

The Many Variations of Form 1099 

As mentioned, there are actually many varieties of Form 1099. We won’t discuss every single one, but here are a few of the more common varieties. Again, these variations track income from different sources. Form 1099-A deals with income related to acquisition or abandonment of secured property. This variation is common when there is a partial mortgage forgiveness or if a home sells in a short sale. Another variation is Form 1099-DIV. This form reports income from dividends. Another common variation is Form 1099-C. This form reports cancellation of debt income.

As we’ve discussed before, when there is debt cancellation, this may be a form of income. If your credit card company forgives a large amount of back credit card bank, expect a Form 1099-C. Form 1099-INT reports any income deriving from interest. This includes interest from bank accounts, shared accounts and so forth. Form 1099-MISC is used for any type of income which doesn’t fit into one of the IRS’s predefined categories. Common examples of “miscellaneous” income is income from prizes or awards. If you participate on a game show and take home winnings, expect a Form 1099-MISC.

Again, these are just a few of the variations of 1099. In the future, we may come back and discuss a few of the other types not mentioned here. If you receive a 1099, a tax payment to the IRS will likely follow. This may not always be the case, as you may qualify for exemptions or other devices which can offset your income. But as a general rule, you should expect that you have incurred a liability to the IRS.

Call Us For Back Tax Help

At Mackay, Caswell & Callahan, P.C., we work hard helping our clients resolve pesky back tax debts with the IRS. We are intimately familiar with all of the many kinds of income a taxpayer can receive. No matter what kind of income your tax debt is based on, we can improve your situation. If you have back tax debt, give one of our top NYC tax attorneys a call today. 

Image credit: Hloom via Flickr / CC BY-SA, 401(K) 2013 

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