The end of the year is coming, and that means it’s time to start thinking about taxes. For those who are freelancing for the first time this year, you might get a mysterious form in the mail labeled 1099-MISC, or some variant thereof. What is this mysterious paper document? That’s what we’re going to teach you.
Insights for a New Freelancer: What is a 1099 Form?
This is a form sent by your clients to you and to the IRS to show proof that you got paid to do a job outside of “normal employment.” If you’ve been employed, you may remember waiting for W2s at the end of the year. The 1099 serves the same purpose, an official record of how much you earned that year from a source of income that’s not involved with regular employment.
The IRS uses these forms to help verify that you are paying and reporting the right amount of income on your tax returns. You should retain copies of all your 1099 forms along with your tax returns.
1099 forms may look like a W2, but have their own tricks. For starters, you’ll likely have more than one since most freelancers don’t have a single client (otherwise you’d likely get a W2!). Also, not every client will send one, nor are they required to do so. The IRS’ explanation of the 1099-MISC can be found at this link, but we’re going to hit the high points in this article and cover some things freelancers need to be aware of.
Your clients should send you all of their 1099s for the year by the end of January. However, if they do not you are still responsible for reporting your income to the IRS! There are several instances where a client won’t need to send a 1099.
Minimums for a Freelancer to Get a 1099
You have to make at least $600 from a client during the tax year in order for them to have to file a 1099 form. For many gig workers, a single client may not sell you that much business in a year, but you’re still responsible for reporting all income on your taxes, even if you only earned $5 off them via Fiverr.
Also, you need to be really aware of your filing requirements. The “payment” for having the freedoms that freelancers have is that you have to pay two different sets of taxes: income taxes and self-employment taxes.
Many new freelancers don’t make a lot of money their first year. Perhaps they are freelancing on the side, or someone else is supporting them while they get on their feet. The filing limit for a single person under age 65 for income taxes is $10,300 for this tax year. This can fool freelancers into thinking they don’t have to pay taxes.
However, this does not account for self-employment taxes. If you make just $400 on your own outside of employment, you still have to pay self-employment taxes. Even if your business expenses made your net profit to go under $400, you still grossed more than $400 and you will need to file proof of your losses with the IRS.
1099 forms will help prove to the IRS what your income was when you file for both types of taxes. They’re both paid through the 1040 form (which you’ll need to use if you get 1099s). Your accountant can give you more information on that. And if you don’t have an accountant yet, get one! They can be invaluable for your first year so you can understand all of your new deductions.
What to do with a 1099 Form, or How to Get One
1099 forms are treated just like W2s. You’ll include copies of them with your federal and state tax filings and keep a copy for yourself. The income on each 1099 is added up along with all other unreported income you earned that tax year.
If you should have received a 1099 and didn’t, you are not going to get in trouble with the IRS. It is the client’s responsibility to mail one to you. If they do not, you can send them a reminder to do so. Your clients are not required to file one federally (though some states do require it) but 1099s are used as proof for subtracting contractor expenses on taxes. So it’s in their best interest to do it.
However, you will need to keep some record of the income you earned from a client if they don’t send a 1099 or if they paid you too little to require one. That is on you.
There is also another form of 1099 that you might get called a 1099-K. If you get paid through a credit card or a payment processor (e.g. Paypal, Stripe), you won’t get a 1099-MISC from your client. Instead, the payment processor will mail out a 1099-K to show all of the payments you received through that payment processor if your payments meet certain requirements. If you use an online job board such as UpWork, you’ll also get a 1099 form from them rather than from the clients you worked with on that particular platform.
Under no circumstances should you file 1099 forms on your client’s behalf. This creates a dangerous audit situation should your client’s 1099 forms be in process. As long as your reported income is equal or greater to the amount reported on all 1099 forms in your name that year, you should avoid unwanted IRS attention. But if you report more than you earned and you file, it will look like you’re cheating the government. The only time you might file a 1099 is if you hired a subcontractor yourself and paid them over $600 and not through a payment processor (e.g. cash, check, ACH). And when all else fails, remember that your social security number is key.
1099 Mistakes a Freelancer Needs to Avoid
To sum up the things you need to watch out for when handling 1099s, here are the high points plus a few additional things to know
- Send copies of all 1099s when you file your taxes and keep a record for yourself.
- If you have income that isn’t covered, keep some sort of record should you ever get audited and report it. You must pay on all your income, regardless if there’s a record or not. This includes cash!
- Don’t forget to pay self-employment tax. If you made over $400, you have to pay it.
- If you paid ahead on taxes (like you should!) you still need to file a return to show the IRS how much you owed.
- If you owe and you need to file an extension, you still have to pay what you can on the due date even if you’re filing later.
- You should always confirm the amount on the 1099 with your own records before filing it. You can’t trust that the client got the amount right. You should be able to back up your 1099 filings with other data.
- If you have an LLC, S-corp, or C-corp, you’ll need to speak with an accountant. You’ll likely need to make a traditional W2 in these cases for your personal taxes, but your corporation will need to turn in the 1099s. Speak with a tax professional for more information.
While we may dread getting 1099s because it means tax time it near, they are the proof that the government needs to show you’re self-employed. If you follow the simple guidelines in this document and read the IRS publications, you should have no trouble using the information on your 1099s when you’re filing next year.