Being self-employed has many obvious advantages, including getting your income pre-tax. As an independent contractor, freelancer or self-employed individual, getting a check for the gross amount owed may feel like you have hit the tax loop-hole jack-pot! But in actuality, Uncle Sam still gets his, its just on the back-end. This is where the 1099-MISC tax form comes in. Whether you just received your first 1099, think you need to send someone a 1099 or are just curious about what happens when you make pre-tax money, here is a simple breakdown of how it all works.
What Is A 1099-MISC Tax Form?
The 1099-MISC Form is used to report miscellaneous income for individuals and companies who have been paid $600 or more in non-employee service payments during a calendar year.
What To Do If I Receive a 1099-MISC Form:
Legally, all individuals or companies who hire an independent contractor or freelancer are required to send a 1099 Form by January 31st of the tax-filing year. So if you did the work in 2011, you should get your 1099 by January 31st of 2012.
If you don’t receive one, but did do work and did receive payment, there could be two reasons. First, if your payment was less than $600 total, the payee doesn’t have to send one. Second, if your payment was $600 or more, your payee may have just forgotten. Consider contacting them to remind them of the work you did and the payment you received, and ask if they plan to send a 1099. It will help the process along if you send them a completed W-9 Form, which basically provides them with your social security number or tax-ID number so they can properly fill out the 1099 Form. If after contacting, they still don’t send anything, legally you are still required to report the income. This also goes for the income that was less than $600.
Quick Example of When You Should Receive a 1099-MISC Form:
Say for example, you work the weekdays as an employee for a corporation, but on the weeknights and weekends, you are a freelance server for a number of party catering companies. Each night you work you receive $100 in pre-tax money (meaning no payroll taxes are taken out). At the end of the year, you have worked 25 nights and have received a total of $2500. The catering companies are under the obligation to send you a 1099-MISC form for the total amount paid (if over $600). You would then report all of the income you earned on your personal taxes under a Schedule C.
What To Do If I Need To Provide a 1099-MISC Form:
Perhaps as an independent contractor, freelancer or small business owner, you needed to outsource some of your work or hire an expert. If this is the case, you are required to provide a 1099-MISC form to any independent contractors, subcontractors or freelancers (not employees and not corporations), to whom you made more than $600 in payments over the course of the tax year. Please note that attorney fees of $600 or more may be handled differently. Check out the IRS website to get clarification.
Quick Example of Why You Would Provide a 1099-MISC Form:
For instance, say you perform in a band and did the booking on a few of your gigs. The client pays you the full amount at the end of the show, and then you take your cut and pay out the remainder of the band with the rest. If by the end of the year you have booked out $10,000 worth of work, and each band member netted $2,000, you would need to provide each band member with a 1099-MISC Form of $2,000. Why? Because it is your legal obligation, and come tax time, you will want the paper trail. You may receive 1099-MISC forms from the clients who booked you in the total amount of $10,000. There is no way you want to be personally responsible to pay taxes on the total amount when you only netted $2,000. Your 1099-MISC forms to your band mates will offer the proof that you hired out a portion of that work – which can be deducted — leaving you only liable to pay taxes on your $2,000.