It’s time to do taxes, and as a small business owner, you feel lost.
It is normal: you must fill out several forms and you may not know which ones you should present in your case.
One of them is form 1099. What is a 1099 form for and should you complete it?
Here we will answer those questions.
Tax forms seem more complicated than they really are. Lose fear. You and your company will win!
What is Form 1099?
The IRS has different forms of 1099 forms with the goal of declaring various payment types and transactions that you make as a small business owner.
These forms feature the name of the person paying and receiving payments, along with their address and identification. It is imperative that this individual data, along with income paid, be accurate when you complete it.
Form 1099 is used for the independent or self – employed contractors to show the amount of tax you have withheld from earnings during the year, and is used for filing federal and state taxes and the Internal Revenue Service (Internal Revenue Service -IRS).
The information on this form is very important to your tax return. Most are received no later than February 1, although there are some exceptions in which the deadline is February 15: Form 1099-B, Form 1099-S, and Form 1099-MISC (the latter depending on the case).
If, on the other hand, you receive 1099 from your employer and the earnings you report differ from what the 1099 form reflects, the IRS will send you a notice requesting an explanation of the discrepancy.
Ultimately, small scale businesses and freelancers who must have made payments to other people in a calendar year make a report of this information to the IRS.
A clear example is Form 1099-MISC: Business owners submit it to independent contractors, such as construction workers hired for a project, or freelancers who are not full-time employees.
To report this type of information, those responsible for making payments send a copy of the completed 1099 form to the IRS and to the recipients of the payments.
Each type of Form 1099 carries different boxes to be completed and the deadlines to send copies to IRS and also to the recipients.
There are different types of Form 1099. It is the equivalent of Form W-2, which is used for the same but is used in the case of being employed.
Income payers show the taxes they have withheld on Form 1099. They may withhold a higher amount (28% rate) if any of the following are true:
You do not provide, or incorrectly provide, the payer with your Social Security Number (SSN) or your Taxpayer Identification Number (TIN).
The payer receives a notification from the Internal Revenue Service (IRS) informing that you have been declaring a lower amount of dividends or interest.
You have not certified that you are exempt from additional withholding of interest taxes and certain dividends.
Types of Form 1099
These are some of the 1099 Forms, among which are the most common:
1099-C: This form is being issued by creditors to their borrowers when their unpaid debts are being paid off. The amount is handled as taxable income that the borrower must pay, even if he only paid part of the debt or nothing at all.
1099-DIV: This type of form reports dividends and capital gain distributions. Major financial institutions such as the banks use Form 1099-DIV to report these payments.
1099-G: Payments made by the government are considered taxable income and must be reported on this form. Examples of these types of payments: state or local tax refunds, some types of grants, unemployment compensation, and farm payments. This form shows the amount of withheld federal income tax. Simply put, the Form 1099-G is for government payments such as tax refunds and unemployment compensation.
1099-K: This form is being issued when you make use of a service to either receive credit or debit transactions which is usually for amounts higher than 20,000 USD and also when a payment made by 200 persons is being processed.
1099-LTC: Long-term care insurance and cash advances on life insurance policies are considered taxable income and therefore must be reported on this form
1099-R: Passive income received from IRAs, retirement plans, pensions, benefit-sharing programs and annuities, are reported on this form. You are to report money withdrawn from a retirement account or money received as disability payments from your life insurance.
1099-SA: This form reports the distributions of savings accounts put aside for medical care and health. If all the money is used to pay for qualified medical fees, such distribution is not taxable. Similarly, you do not have to pay taxes if the distribution is transferred to another HSA, MSA or MA account.
1099-MISC: This is one of the forms that small business owners typically must issue. Form 1099-MISC is used to report the wide range of payments made to third parties, service workers and independent contractors or from sources of income if you are the one who received the payment.
Some examples of these payments: amount of at least $600 per rent, additional services provided to freelancers, awards and rewards, payments to an attorney, direct sale of consumer goods destined for resale for a value equal to or greater than $5,000, payments to fishing boats, consultants, artists, rental payments, prizes, and other types of payments.
Recipients must receive their copy by February 1, or by February 16, 2020, for those earnings reported in boxes 8 and 10.
Don’t let the 1099 form take your sleep away!
Whether you use a calculating device or prefer to consult your accountant, you shouldn’t be intimidated by the 1099 form.
Actually, their mission is to help report payments for business owners so that taxpayers who have received those earnings during the year pay the correct amount of taxes.
It is also a legal way for a company to report the payments it makes to others.
When in doubt, it is always wise to go to a professional tax preparer – you will avoid mistakes and file a correct and accurate return.