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Understanding Tax Terms: All those 1099’s – Be prepared to file your tax return

Understanding Tax Terms: All those 1099’s – Be prepared to file your tax return

So many 1099’s. How do you keep them all straight? Here is a quick review of the most common 1099’s to help you prepare to file your tax return.

Most taxpayers receive at least one 1099 each year. Virtually every small business, including sole-proprietors, must issue at least one 1099 each year. Here is a summary of the most common of these informational tax forms that you will need to file your tax return this year.

The Form 1099

The Form 1099 is an informational tax form that captures economic activity that is then reported to you and the tax authorities. The primary purpose of the form is to ensure you are reporting your taxable income. The forms are typically required to be sent to you on or before January 31st each year. The same information is due to the IRS on or before February 28th (March 30th if the form is filed electronically).

Common 1099 Forms

1099 INT: This is the form you receive for interest earned. You should expect one of these for every bank account that pays interest, no matter the dollar amount of interest.

1099 DIV: This form captures dividends paid to you. Correct classification of dividends on this form is crucial. Tax rates are lower for qualified ordinary dividends versus other types of dividend payments.

1099 B: You will receive this form if you sell stocks or mutual funds. This tells the IRS to look for possible taxable investment sales.

1099 MISC: This is the default catch all 1099 for income earned when you are not an employee. This form is provided to independent contractors and attorneys for gross compensation. If you are a sole proprietor, each of your customers that are billed over $600 should be sending you one of these forms.

1099 R: You will receive this form if you have distributions from a qualified retirement account during the year.

1099 G: This form captures governmental payments to you. You may receive one of these if you receive a state tax refund.

1099 SA: This form captures distributions from health reimbursement accounts like HSA’s and MSA’s.

What you need to know

  • Use the information in this tip to ensure you are receiving the necessary 1099’s to file your tax return.
  • To be sure, create a list to confirm receipt of the necessary 1099’s. Missing 1099’s is a common reason for a delay in filing your tax return.
  • There are other types of 1099’s. If you receive a 1099 and are not sure what the form is, ask for clarification.

Remember, the IRS receives these forms. Their computers will run a cross-check against your return to ensure you have not omitted any of them.

Contractor or Employee? Knowing the difference is important

Too many small businesses have been taxed and penalized for having independent contractors that the IRS believes should be employees. This is even more critical given the requirement to have health insurance.

Is a worker an independent contractor or an employee? This seemingly simple question is often the contentious subject of numerous IRS audits. As an employer, getting this wrong could cost you plenty in the way of Social Security, Medicare taxes, and other employment related taxes. Here is what you need to know.

The basics

As the worker. If you are the worker and you are not considered an employee you must;

  • pay self-employment taxes (Social Security and Medicare related taxes)
  • make estimated federal and state tax payments
  • handle your own benefits, insurance, and bookkeeping

As the employer. You must ensure your employee versus independent contractor determination is correct. Getting this wrong in the eyes of the IRS can lead to;

  • payment and penalties related to Social Security and Medicare taxes
  • payment of possible overtime including penalties for a contractor reclassified as an employee
  • legal obligation to pay for benefits

Determining the answer: things to consider

When the IRS recharacterizes an independent contractor as an employee they look at the business relationship between the employer and the worker. The IRS focuses on the degree of control exercised by the business over the work done and they will assess the worker’s independence. Here are some tips.

  • The more the employer has the right to control the work, when the work is done, how the work is done, and where the work is done, the more likely the worker is an employee.
  • The more the financial relationship is controlled by the employer the more likely the relationship will be seen as an employee and not an independent contractor. To clarify this, an independent contractor should have a contract, have multiple customers, invoice the company for work done, and handle financial matters in a business-like manner.
  • The more business-like the arrangement the more likely you have an independent contractor relationship.

While there are no hard set rules, the more reasonable your basis for classification and the more consistently it is applied, the more likely an independent contractor classification will not be challenged.hrll