As with most things, the IRS is quite clear on how much someone must earn before you have to issue a 1099 Form. If you pay for services rendered by a worker or independent contractor, and these services total more than a certain amount in any given year, then you should be issuing 1099s. These payments can be for things such as wages paid to your gardener for maintaining the landscape of your personal residence or for child care services like babysitting.
You aren't automatically required to issue a 1099 in all situations. However, the IRS has some rather straightforward 1099 rules that need to be followed when determining if you need to do so.
1099 Form Types
Generally, when people refer to a 1099 Form, they are referring to IRS Form 1099-MISC, Miscellaneous Income, which is used to report earnings paid to an independent or self-employed contractor for tax years prior to 2020. For 2020 and beyond, the IRS has introduced the new Form 1099-NEC, just for reporting independent contractor income. NEC stands for non-employee compensation. Independent contractors and freelancers are not considered employees for IRS purposes, so they do not receive an IRS Form W-2 at the end of the year for their services, but rather a 1099.
However, there are way more types of 1099s than the average taxpayer may be aware of. Though, if you are an investor, you're likely not only familiar with some of the more obscure types of 1099s one can receive, you probably have first-hand knowledge of them. For example, if you receive interest from interest-bearing checking or savings accounts, or from investments like Treasury bills, this is all reported on IRS Form 1099-INT, Interest Income.
Your retirement account payouts as well as pensions are reported on 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. If you're a shareholder and receive dividends, then you can likely expect to receive an IRS Form 1099-DIV, Dividends and Distributions, while income from real estate transactions is reported on IRS Form 1099-S, Proceeds From Real Estate Transactions.
Who Should Issue a 1099?
When you pay someone less than $600 during the year for any services they rendered to you, then you do not need to issue an IRS Form 1099-NEC. The thing is, there may be several people you pay in the course of the year, for various services they provide for you, who you may not even consider as contractors or workers. But this does not mean that the IRS doesn't, and you should be supplying them with 1099-NEC as well as sending a copy to the IRS.
Although it might be a little difficult to view your mother and teenage neighbor, both of whom babysit your children while you're at work, as independent contractors or workers, the truth is, they are providing a service and you are paying them for this service. And, in true fashion, the IRS wants to know about these transactions to make sure all parties are reporting income and paying taxes accordingly.
How to Determine Status
When you pay someone for work they do, the IRS regards their status in one of two ways: either they are doing this work in the capacity of an independent contractor, or they are your employee. Basically, the way the IRS determines whether someone is an employee or an independent contractor comes down to a set of three criteria – behavioral, financial and type of relationship.
The Three Criteria
The behavioral aspect addresses how much control you have over the way the job is performed, while how a worker is paid forms the basis of the financial criteria. Then, there is the type of relationship criteria, which addresses any written contracts that exist between you and the worker as well as the permanency of the relationship or any benefits a worker may receive.
For example, if you pay your neighbor to babysit your children in your home, and you largely control how she watches the children, when they need to be picked up from school or put to bed and how or what they are fed, chances are your neighbor would qualify as a household employee. In this case, she should receive an IRS Form W-2 at the end of the year for these services.
However, if she had more autonomy over where and how the children are taken care of, or largely babysits them in her own home, then the IRS likely views these as services rendered by an independent contractor or self-employed worker. In this case, you need to supply her with an IRS Form 1099-NEC at the end of the year if you paid her more than the 1099 minimum of $600.
One Size Does Not Fit All
It is important to keep in mind, there is no one-size-fits-all scoring for these criteria that automatically determines whether or not someone falls into either employment status. Rather, the IRS suggests that business owners take all of these factors into consideration in order to help determine a worker's status.
Fortunately, if you're still unclear after assessing the status of a worker, you can use IRS Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, so the IRS can help determine this for you. Form SS-8 may be completed by either the employer or the worker to determine employment status.
Reporting 1099 Income
According to the IRS, it is a common misconception among taxpayers that workers must earn more than $600 before they are required to report this income, but this is not the case. Although, it is true that a company or person paying an independent contractor less than $600 during the course of the year does not have to supply a 1099-NEC for the work completed, this has no bearing on whether or not the worker must report this income to the IRS. In fact, self-employed workers must report all self-employed earnings in excess of $400 for the year on their federal income tax return.
For instance, if someone paid you $500 for contract work you did for him, the IRS does not require that he send you a 1099-NEC for this work, because it is under the $600 minimum. But, you are still responsible for reporting this income on your individual income tax return because it is more than the yearly self-employed earnings threshold of $400. Because your client is not responsible for giving you a 1099-NEC for this work, keeping meticulous records of all payments you received, and from whom, is supremely important when it comes to squaring up with Uncle Sam at tax time.
Luckily, if you are unsure whether or not you need to file a tax return, the IRS has an interactive tax assistant tool on its website that will help you determine your filing status and if you need to file taxes on your earnings or not.
Filing Taxes With a 1099
In order to report your 1099 income, first, you need to gather all of the 1099s you received from all sources in order to complete your IRS Form 1040, U.S. Individual Income Tax Return. Because the IRS considers any income reported on a 1099 form to be taxable income, regardless of which type of 1099 it is you receive, you have to take them all into account. Next, add up the income reported on each 1099 and use this information to complete your federal income tax return.
You do not, however, need to attach a copy of your 1099 to your tax return. IRS Form 1040 instructs taxpayers to only attach any supplemental forms (such as 1099s) to their federal income tax return if there were federal taxes withheld. Generally, you will not have any taxes – federal, Social Security, Medicare or otherwise – withheld from any of the 1099s that you receive. So, you will likely not have to attach the 1099. However, if for some reason you do notice taxes withheld on your 1099, then you will need to attach any supplemental forms to your tax return.
Read more: What Happens If I Get a 1099 After I File My Taxes?
Reporting Income Without a 1099
This is where things can get a little tricky. When it comes time to file taxes, you may or may not have received a 1099 from the person or company paying you. This could be because of an oversight, outdated mailing information or because you simply did not earn enough from a single payer so no 1099 was issued.
Even without a 1099, you are still responsible for reporting this income to the IRS. If you do receive a 1099 from your client, then filing your taxes is rather straightforward. If you do not, then you may have to do a little work to get this information in order to file your taxes on time.
How to Get Income Information
Because there are many different forms of 1099s, you have a few options available to you for obtaining the income information you need to accurately file. Banking institutions and investment firms both supply their clients with 1099s that show how much was earned in terms of dividends or any interest that was paid for the year.
So, if you have misplaced or never received a 1099-DIV or 1099-INT, for instance, you can simply use your last year-end statement detailing all of the interest or dividends you received during the year. You can also contact the institution directly for further assistance, or check your online statement for year-to-date summaries of your accounts.
When the 1099-NEC is Missing
If you are missing a 1099-NEC from a client, and need to file your taxes, you also have a few different ways to get the information reported on it. This is where keeping stellar business and income tax records records will prove invaluable. When you know you take great care to keep accurate records of any transactions you engage in for your business, then you already have the information reported on a 1099 at your fingertips.
Because the IRS doesn't require you to attach your 1099 to your tax return, as long as you are accurate in reporting your earnings, you may go ahead and file your taxes using the income your records indicate you have received. You also can always contact the IRS or client directly to confirm that he has the correct information on file for you and to see whether or not he has mailed your 1099 yet.
Using an Estimate of Earnings
In the event you cannot contact the client, and do not have accurate records of how much you were paid, you can still file your taxes, but do so carefully. When you are unsure of exact amounts, it is best to overestimate your earnings than to underestimate. While this could result in over-payment of taxes, you will simply receive a refund; whereas if you underestimate or fail to report income and the IRS discovers this, you could find yourself facing stiff penalties.
If you have already filed your taxes then subsequently receive your missing 1099, you should double check the 1099 against what you report. If you notice any discrepancies between your 1099 and what you reported on your federal income tax return, then you will need to immediately file IRS Form 1040X, Amended U.S. Individual Income Tax Return, to correct this mistake. Should the IRS take a closer look at your return and notice the discrepancies, filing an amended return affords you some level of protection and exhibits that you are attempting to correct the error.
- efile: 1099 Form Information-Types, Filing Requirements, Due Dates
- IRS: Independent Contractor (Self-Employed) or Employee?
- efile: Income Taxes for Self-Employed Business Owners and Independent Contractors
- Bankrate: You don’t have to wait for IRS Form 1099 from various issuers to file your tax return
- IRS: 1099-NEC
- IRS: About General Instructions for Certain Information Returns
- IRS: About Form W-2, Wage and Tax Statement
- IRS: About Form 1099-INT, Interest Income
- IRS: About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
- IRS: About Form 1099-DIV, Dividends and Distributions
- IRS: About Form 1099-S, Proceeds from Real Estate Transactions
- IRS: About Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding
- IRS: About Form 1040
Tara Thomas is a Los Angeles-based writer and avid world traveler. Her articles appear in various online publications, including Sapling, PocketSense, Zacks, Livestrong, Modern Mom and SF Gate. Thomas has a Bachelor of Science in marine biology from California State University, Long Beach and spent 10 years as a mortgage consultant.