Tax season is great for people with 9-5 jobs.
Getting a nice chunk of your money back is always refreshing. But, it’s a little different for freelancers and independent contractors.
If that’s you, you probably have had to deal with a 1099 tax form. More specifically, a 1099 misc form. These can be a little intimidating if it’s your first time around, but I promise it’s not a complicated task.
There are just a few simple steps you have to take when filing a 1099 tax form. Keep reading to learn more about what this form is, and how to file a 1099 misc correctly.
What is a 1099 Misc Form?
In short, the 1099 misc form reports the total number of payments which you receive for a specific service.
If you are the employer or the person receiving the service, the 1099 misc form is what you would provide for your independent contractor.
Who Exactly Receives the 1099-Misc Form?
Those who would receive a 1099 misc form are technically “non-employees”. This includes people who work for you or your company that are not your direct employees. Examples are cleaning services, IT support, and maintenance workers. This also includes independent or freelance contractors.
The 1099 misc form is required for payments of $600 or more. Even if you receive less than the $600 threshold, you’ll still have to report your income to the IRS.
If you are an independent contractor, you are required to file the schedule C section of the 1099 misc form yourself. Your pseudo-employer is only responsible for providing you with the form itself as well as a W-9 form. The W-9 serves the purpose of proof of a valid tax identification number.
The W-9 form is an absolute necessity when filing your 1099.
How to File a 1099 Misc Form Correctly
You should receive your 1099 misc form by January 31 of each year. A copy should also be sent to the IRS, however, this is the responsibility of the employer. (If you are the employer you are expected to submit Copy A of the 1099 form to the IRS, and Copy B to the independent contractor).
It is important to note that if your payments are processed through a third party company, then your income will most likely be reported on a 1099-K.
There are three steps to filing a 1099 misc form:
The first thing you’ll want to do is get all of your income information together. This includes any tax forms you receive in January. As mentioned previously, even if you did not receive a 1099 misc form because you did not meet the $600 threshold, you’re still required to report any income.
It’s best to keep a thorough record of your payment history as an independent contractor or freelancer. However, you can always check your bank statements for proof of the income that you will need to report.
It is also important to understand that as a freelancer you will have different taxpaying responsibilities. You are expected by the IRS to pay a self-employment tax quarterly. This covers the Medicare and Social Security that would normally be withheld by your employer.
The general rule of thumb is to save about 25%-30% of your overall income. The IRS will penalize you for not paying your quarterly taxes. But, if you get stuck in a bind and need help covering your IRS payments on a contractor’s income, Hunter Galloway may be able to help.
Next, you’ll want to gather all of your deduction information. As a freelancer, you will most likely have work-related expenses. If you pay for these expenses out of pocket, then you will be able to deduct them from your business income. This will reduce how much you will pay in taxes.
In terms of deductions, what you consider business expenses must be commonly accepted as ordinary and necessary. Some examples of these acceptable deductions are:
- Self-advertising: business cards, online ads, website hosting, etc.
- Office expenses: computers, software, internet access, WIFI, etc.
- Meals and entertainment for clients
- Transportation for both you and your clients
Of course, you’ll have to provide documentation as proof like receipts, invoices for inventory and equipment, phone bills, internet bills, mileage logs, and bank statements.
The documentation you provide will have to justify the business purpose of your expenses. They will also have to be explicit in their details in terms of the amount spent, the time and place of purchase, and the name of the vendor.
Most of these expenses will likely be applied to both your business and personal life. In this case, the IRS will want to see how often an asset, like your cell phone, is used for your work and how often it is used for your personal life.
For added protection, you’ll want to hold on to all of your receipts and documentation for at least three years after filing your 1099. Why do you need this kind of protection? —Because you don’t have to send in the physical documentation of your expenses with the 1099 misc form. It usually takes the IRS up to three years to check suspicious tax returns and perform audits.
By keeping your documentation and receipts in your records, you’ll have the proof of your expenses should an audit arise.
Lastly, you’ll need to choose how you will be filing your 1099 misc form.
There are a few ways that you can file your 1099 misc form. You can go through your tax preparer or CPA, tax filing software, non-profits, or you can always fill out the forms by hand.
If you have multiple complicated forms and are able to pay a professional, hiring a tax preparer or CPA is your best option. They will be able to answer any questions that you have and provide you with information that you may have missed.
If you make below $55,000 per year or have a disability, you may be able to qualify for Volunteer Income Tax Assistant (VITA). VITA are IRS-certified volunteers who will provide free basic income tax filing.
If you’ll be filing your 1099 forms by yourself, software is a good option as well. Prices vary depending on the company, but the process is generally straight forward. When you pay and download software for companies like H&R Block, human support is included as well.
However you choose to file, just make sure you do so by the deadline!
Go Ahead and File Away
Now that you understand the correct way how to file a 1099 misc form, tax season should be a breeze.
For more life tips from gardening to taxes and beyond, come and check us out. We’ve got plenty of advice to give.