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Taxes

What Is a 1099 Form and How Does It Work?

Are you one of the 59 million freelance workers in the U.S.?1 Congratulations! Technically that means you are self-employed. Whether you’re designing websites or delivering groceries as a side hustle, you are your own business—the CEO of “You Inc.” At least that’s how Uncle Sam sees you.

Working for yourself definitely has its perks, but it also comes with its own challenges—especially when tax season rolls around. One of those challenges is figuring out what to do with those 1099 tax forms that start coming in from all those clients who paid you for a job well done.

Don’t worry, we’ll walk you through the different types of 1099 tax forms, why you got one (or ten), and what you’re supposed to do with them.

What Does a 1099 Employee Mean?

If you are self-employed, a company might call you a 1099 employee because at the end of the year they’ll send you a 1099-NEC form that lists your income instead of the W-2s they send to their employees. The IRS really classifies you as a nonemployee because you don’t receive the same benefits and payroll deductions as an employee of a company.

What Is an IRS 1099-NEC Form?

The 1099-NEC tax form helps freelancers and independent contractors report income they earned from different sources throughout the year to the IRS. NEC stands for nonemployee compensation. Basically, Uncle Sam wants to make sure all that hard-earned money is on the grid.

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The 1099-NEC will include the name, address and tax identification number of the business or client who paid you and your name, address and Social Security number. When you receive the form, the type and amount of payments you received from the business you freelanced for will already be filled out.

Before the IRS created the 1099-NEC form in 2020, nonemployee compensation was reported on the 1099-MISC form, which is still around (minus the nonemployee compensation box). We’ll talk about the 1099-MISC a little later.

What’s the Difference Between a 1099-NEC and a W-2 Form?

Both the 1099-NEC and W-2 forms basically serve the same purpose, which is to report your income to the IRS. But the difference is that W-2 forms go out to employees while 1099s are sent to nonemployees, including freelancers and contract workers. And it’s very possible you’ll receive both forms during tax season!

For example, let’s say you’re a full-time teacher at a local middle school, but you also freelance as a photographer for a local newspaper.

As an employee at the middle school, you’ll get a W-2 form. But as a freelancer, you’ll receive a 1099-NEC from the newspaper you shoot for.

Remember, taxes have usually been taken out of your W-2 income, but not your 1099 income. If you’re juggling a bunch of tax forms and not sure where to start, it’s probably a good idea to connect with a tax pro who can sit down with you and help you understand your tax situation.

Who Gets a 1099-NEC Form?

If you received $600 or more in payments from a particular business or client, they are required to send you a 1099-NEC form by January 31, as well as a copy to the IRS. So, if five companies paid you more than $600 last year, you should get five 1099 forms—one from each company.

If that January 31 deadline comes and goes and you still haven’t gotten your 1099 form, you should reach out to that company or client to get that straightened out.

But if you were working as a contractor for a company, such as a rideshare business like Uber, where you collect electronic payments from customers, you’ll receive a 1099-K form from the company.

What Is a 1099-K Form?

The 1099-K is a tax form that shows all the payments you received through a credit or debit card or some other electronic payment system. Until recently, businesses didn’t send you a 1099-K unless you collected more than $20,000 or had more than 200 transactions during the year—so you might never have received a 1099-K from your clients. But starting next year, the threshold has been lowered to $600, which means a lot more people will be getting 1099-Ks for the 2022 tax year.2

If you didn’t get a 1099-NEC or 1099-K from a client you worked for, does that mean you don’t have to report that income? Not so fast! Even if you earned, say, $400 for some freelance work and didn’t receive a 1099 from the company you freelanced for, you’re still required to report that income when you file your taxes. This leads us to yet another 1099 form—the 1099-MISC.

What Is an IRS 1099-MISC Form?

The 1099-MISC is the catch-all for most of the miscellaneous income (that’s what the MISC in 1099-MISC stands for) you earned outside of income documented on a W-2, a 1099-NEC or a 1099-K. The money you make with your side hustle isn’t the only type of income that has to be reported to the IRS, and all those other types of income are covered by the 1099-MISC form. The 1099-MISC includes boxes for rents, royalties, fishing boat proceeds, crop insurance proceeds and several other types of income.

1099-MISC Instructions

A 1099-MISC form includes a bunch of boxes that can be kind of confusing at first glance. Some are very specific, like fish purchased for resale. Any fishmongers out there? But here are some of the highlights of the types of income covered by the 1099-MISC:

  • Rents. If you own property that you rent to a business, the business will  send you a 1099-MISC that includes the amount of rent they paid you. (If you rent residential property, you probably won’t receive a 1099-MISC.)
  • Royalties. These are payments made to you for the use of property that you own, from oil and mineral properties to copyrights and patents. Whoever pays you royalties should also send you a 1099-MISC if you earned over $10.
  • Other income payments. This includes things like certain types of legal damages, jury duty pay and pay for being part of a medical study. It also includes prizes and awards. Did you win that sweepstakes for an all-inclusive cruise vacation? While you’re sipping piña coladas in the Bahamas, remember that you’re required to pay taxes on any prizes and awards worth more than $600.
  • Medical and health care payments. If a business makes payments of $600 or more to physicians and other health providers for medical services, they’re required to send out a 1099-MISC to the providers.
  • Payments to an attorney. Lawyers also get a 1099-MISC when they get paid $600 or more by a business for their services.3

There are several other types of miscellaneous income the 1099-MISC is used to report, including substitute payments to brokers that take the place of stock dividends and fishing boat or crop insurance profits, but for most folks those boxes will remain blank on the form.

Other Types of 1099 Forms

The IRS has more than 20 types of 1099 forms, but here’s a look at some of the more common ones:

  • 1099-A: A is for Acquisition or Abandonment of Secured Property. Clear as mud, right? You’ll receive a 1099-A if you owned property that went into foreclosure and the bank canceled a portion of your debt or sold your property.4
     
  • 1099-B: B is for … ball. No, not really. It stands for broker and barter. The IRS description for the 1099-B form is Proceeds From Broker and Barter Exchange Transactions. You’ll receive a 1099-B if you sell stocks, bonds, commodities and other types of investments through a broker.5

    The second part of the 1099-B is barter exchange transactions.6 A bartering exchange is a marketplace (usually online) where people or companies can exchange products and services. But before you freak out and think trading baseball cards or clothes with a buddy is going to get you in trouble with the IRS, the 1099-B does not cover informal trades, just ones done through a bartering exchange.

    Some types of bartering should be reported as income even if you don’t receive a 1099-B. For example, an HVAC guy might install a new furnace for an accounting firm in exchange for them handling his books. The HVAC guy will have to count the value of that service as income—and hopefully the accounting firm will help him figure that out on his taxes!
     
  • 1099-C: C is for cancel, as in Cancellation of Debt.7 Having a debt canceled is a time to celebrate, but the IRS is going to rain on your parade a little bit because it considers canceled debt as income. If you negotiated with a collections agency to cancel more than $600 of your credit card debt, you’ll receive a 1099-C to let you know you have to pay taxes on that canceled debt.
     
  • 1099-DIV: This form is for Dividends and Distributions.8 Dividends are payments companies make to their stockholders to share their profits, and, yes, they are subject to taxes. A distribution is a taxable payment a mutual fund makes to shareholders based on the earnings of that fund.
     
  • 1099-G: G is for government, as in Certain Government Payments. A 1099-G lists unemployment compensation, state or local income tax refunds, reemployment trade adjustment assistance (RTAA) payments, taxable grants and agricultural payments.9 Most of that seems pretty clear, but what in the world is RTAA? We’ll save you some time googling it. RTAA is a federal program that provides extra money to make up the difference in pay for workers over age 50 who had to take a lower-paying job after losing their jobs due to the effects of foreign trade.
     
  • 1099-INT: INT stands for Interest Income.10 If a bank or other institution has paid you more than $10 in interest in a year, you’ll receive a 1099-INT. Unless you keep your life savings stuffed under your mattress earning zero interest, you’ve probably received a 1099-INT at some point.
     
  • 1099-Q: Q stands for qualified, as in Payments From Qualified Education Programs.11 If you withdraw money from an Education Savings Account (ESA) or a 529 plan, you’ll receive a 1099-Q. But you’ll only be taxed on the amount of the withdrawal that exceeded school expenses.
     
  • 1099-R: R is for retirement. The 1099-R is for Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.12 Wow, the IRS included everything but the kitchen sink in that title! If you received money from any of these sources, expect to get a 1099-R (even if you aren’t retired). Here again, most of these sources of income are self-explanatory, except maybe insurance contracts. This refers to permanent or total disability payments made by insurance companies.

What to Do When You Receive a 1099 Form

OK, so you’ve gathered all of your 1099 forms . . . now what? You can plug all of that info into tax-filing software, like Ramsey SmartTax. It’s tax software you can trust with no hidden fees.

Or if doing your own taxes gives you the sweats or you think your tax situation is too complicated, a tax pro can help. Endorsed Local Providers (ELPs) are RamseyTrusted tax pros who will help you get your taxes done right.

Find your tax pro today!

 

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

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