Independent contractors receive 1099 forms instead of the W-2s issued to employees. 1099 forms also serve many other purposes. Understanding the different 1099 forms allows independent contractors to file their taxes correctly.
What Is a 1099 Form?
A 1099 form reports most types of non-employment income to the IRS and state tax agencies. The person or entity making the payment must file a 1099 form. The payment recipient will receive copies to use when preparing their tax return.
Any business—including a self-employed individual—making certain payments to a person or business must issue a 1099 form. However, most payments made to a C corporation do not require filing a 1099 form. The requirement usually kicks in for total payments of at least $600 during the year, but some types of payments have higher or lower thresholds.
Even if the payor fails to file a 1099 form, the payment recipient remains responsible for properly reporting and paying tax on their income. This means independent contractors must keep their own financial records.
Many different types of 1099 forms exist to report various kinds of payments.
What Is a 1099 MISC?
Form 1099-MISC, Miscellaneous Information reports many kinds of miscellaneous payments totaling over $600 during the year. These include rents, prizes and awards, and certain medical payments. Independent contractors used to receive a 1099-MISC, but in 2020 the IRS introduced Form 1099-NEC for independent contractors.
Form 1099-NEC, Nonemployee Compensation applies to all payments made for work performed by independent contractors, including freelancers and self-employed individuals. Some businesses mistakenly refer to independent contractors as "1099 employees," but actual employees receive a W-2, not a 1099-NEC.
Determining whether a person performing work is an employee or contractor can prove controversial. Employees often receive benefits and only pay half of the FICA tax—7.65% of wages—with the employer paying the rest. Independent contractors pay self-employment taxes instead of FICA and don't usually receive benefits.
Many employers prefer to hire independent contractors rather than employees whenever possible. This can allow independent contractors to negotiate better compensation. Also, independent contractors can usually deduct business expenses.
Individual independent contractors report nonfarm income from box 1 of the 1099-MISC on Schedule C attached to Form 1040—their income tax return. They must also file Schedule SE, Self-Employment Tax with their tax return to calculate their self-employment tax. Independent contractors often need to make estimated tax payments throughout the year because businesses usually don't withhold taxes for independent contractors.
What Is a 1099 DIV?
Many people besides independent contractors receive a 1099 form. Form 1099-DIV, Dividends and Distributions, is one of the most common forms. It reports dividends and capital gains distributions from financial institutions. These can occur due to the ownership of stocks, mutual funds, and exchange-traded funds. Dividends and distributions made to retirement accounts do not trigger a 1099-DIV.
Ordinary dividends shown in box 1a of Form 1099-DIV go on Schedule B of Form 1040, while qualified dividends in box 1b of Form 1099-DIV go directly to line 3a of Form 1040. Capital gains distributions from box 2a of Form 1099-DIV usually go on Schedule D of Form 1040. Apart from these common items, a 1099-DIV has many other boxes which may require different tax treatment.
Other 1099 Forms
Some of the other most common kinds of 1099 forms include:
- 1099-B. Issued by brokers to show transactions made by the recipient. Examples include sales of individual stocks and other securities.
- 1099-C. Reports when most non-mortgage lenders forgive or settle debt at a discount. You may owe taxes on the amount written off by the lender.
- 1099-G. Discloses money received from a state or local government. The most common items include state tax refunds and unemployment income.
- 1099-INT. Reports interest income earned.
- 1099-K. Discloses payments made by customers through credit cards or third-party systems like Venmo. It often applies to small businesses and freelancers.
- 1099-R. For retirement distributions, including most pensions, individual retirement accounts (IRAs), other retirement plans, annuities, and life insurance.
Understanding Form 1099-MISC and other relevant 1099 forms allows independent contractors to file their taxes accurately.