The 1099 is a common annual form used by the IRS to record financial transactions between payors and payees. They are typically issued by a financial institution, government or business. There are many 1099 forms in use by the IRS. The type of 1099 will depend on who is issuing the 1099 and for what reason.
The gig economy has made contract work a popular option for income and, as a result, many people are receiving 1099-MISC or 1099-NEC forms to report their gig-related income. Other individuals may receive a 1099-B from their brokerage firm indicating gains or losses. Banks commonly issue 1099-INT forms to report interest earned. Individuals receiving retirement distributions receive a 1099-R form, while recipients of unemployment insurance will receive a 1099-G.
What Does a 1099 Report to the IRS?
The 1099 forms are used to report non-employment income to the IRS, and often the income reported has not been taxed. The IRS utilizes over a dozen different 1099 forms, depending on the source of income. Broadly speaking, 1099 income can be classified as earned or unearned income. Certain 1099 forms, such as the 1099-R or 1099-INT, are used to report unearned income from pensions or interest payments.
The IRS has newly reissued the 1099-NEC for the 2020 tax season to report earned income paid to contractors, according to SHRM. The 1099-MISC, previously used for reporting non-employee income, will no longer be used to report non-employee compensation.
Earned income and unearned income are taxed at different rates and impact eligibility for the refundable credit known as the Earned Income Tax Credit. Earned income reported on a 1099-NEC or on box 7 of a prior year 1099-MISC is considered to be self-employment income. This allows for the deduction of related business expenses on the IRS Schedule C form.
When is a 1099-NEC or 1099-MISC Issued?
If an individual is paid $600 or higher in non-employee compensation, they will be issued a 1099-NEC for 2020 income. The IRS has reissued the form 1099-NEC for the 2020 tax season to replace box 7 on the 1099-MISC, which up until recently was standard for reporting non-employee payments. Any income appearing in box 7 of a 1099-MISC prior to 2020 is automatically considered to be self-employment income by the IRS. Even if an individual is not formally issued a 1099 for contract work, any non-employee payments for work should be included on an individual tax return.
1099 income is taxed by the IRS at the self-employment tax rate of 15.3 percent. This rate includes 12.4 percent for Social Security and 2.9 percent for Medicare. Self-employment tax liability can be offset by deducting business expenses. All self-employment income goes on a Schedule C form, which is also where any related deductions will be listed.
Which Deductions Apply for 1099 Income?
There are a number of business expenses that can be deducted on Schedule C for 1099 income. The Schedule C form will be submitted to the IRS with the 1040 individual tax return. For individuals whose self-employment includes driving, there is the option to take either the standard mileage or actual cost deductions. Vehicles and other tangible property with a life expectancy of over a year can be depreciated.
Most costs associated with operating a business can be expensed on Part II of Schedule C. Advertising costs, professional licensing, equipment, travel, supplies, repairs and maintenance are all common deductions for 1099 income. According to Kiplinger, there are also a number of commonly overlooked deductions, such as expensing a home office or qualified business income.
Be aware that no personal expenses or personal vehicle expenses can be deducted. Merchants and others dealing with inventory can deduct the cost of goods sold in Part III of Schedule C. Part V of the Schedule allows for expenses that do not fit into the categories provided for Part II. This might include business expenses that are unique to a specific industry.
Records should be maintained that will reflect the accuracy of all deductions in case a return is audited. All mileage and expenses should be written or digitally recorded.
- SHRM: What is the difference between IRS Form 1099-NEC and Form 1099-MISC?
- Kiplinger: Most-Overlooked Tax Breaks and Deductions for the Self-Employed
- IRS: Self-Employment Tax (Social Security and Medicare Taxes)
- IRS. "1040 and 1040-SR," Pages 82-84. Accessed Aug. 10, 2020.
- IRS. "Income—Other Income," Page 7. Accessed Sept. 10, 2020.
- IRS. "Alimony, Child Support, Court Awards, Damages 1." Accessed Aug. 10, 2020.
- IRS. "Topic No. 452 Alimony and Separate Maintenance." Accessed Aug. 10, 2020.
Hashaw Elkins is a financial services professional and project management consultant. She has led projects across multiple industries and sectors, ranging from the Fortune Global 500 to international nongovernmental organizations. Hashaw is further certified in organizational change management, diversity management, and cross-cultural mediation.