There are many different 1099 forms – 16, to be precise, as of 2014. They all serve the same general purpose, which is to provide information to the Internal Revenue Service (IRS) about certain types of income from non-employment-related sources. The payers of these types of income must send one copy of form 1099 to the IRS and another copy to the recipient of these payments (in other words, the taxpayer). They should also send a copy to the recipient's state tax agency and keep a copy for their own records.

Form 1099, like many other tax forms, is meant to encourage people to report all of their income so the IRS can collect the full amount of taxes it is owed, or, as the IRS puts it, “to increase voluntary compliance and improve collections.” That’s why form 1099 is technically called an “information return.”

A Targeted Tax Tool

Is form 1099 an effective tool in helping the IRS collect taxes? The answer appears to be yes. IRS computers compare taxpayers’ reported income on form 1040 against the information reported on 1099 forms and other forms, such as the W-2, which employers use to report the wages and salaries they pay. In 2012, the IRS collected an additional $7.1 billion that taxpayers didn’t initially report and pay voluntarily, thanks to these computer checks.

As an individual taxpayer, you are not responsible for completing a 1099 form, except in a few circumstances (most commonly, if you own a small business and you hired an independent contractor during the year). Typically, financial institutions draw up the appropriate 1099s and you’ll receive copies electronically or by mail by early February because the payer is required to file them by January 31.

Here are four of the most common 1099 Forms:

1099-DIV – Dividends and Distributions If you own a stock or mutual fund that pays dividends, you should receive this form.

1099-INT – Interest Income, You should receive this form if you have a checking, savings or other bank account that earns interest.

1099-MISC – Miscellaneous Income, You should receive this form if you worked for someone as an independent contractor. If you’re self-employed and have several clients, you should receive a 1099-MISC from each client who paid you $600 or more.

1099-R – Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., If you received $10 or more from your IRA or one of the other sources of retirement income listed here, you should receive this form.

For a complete list of 1099 forms, see Filling Out 1099 Forms.

Keeping Track: Do You Owe Estimated Taxes?

Taxes are not withheld from the types of income reported on 1099 forms unless the IRS has determined that you are subject to backup withholding, which might be the case if you underreported income in the past.

All the same, if you anticipate a large amount of 1099 income for the year, you should make estimated tax payments during the year to avoid IRS penalties and interest.

If you earn income that should have been reported on form 1099 – but you did not receive a 1099 form – you are still responsible for reporting that income on form 1040 and paying tax on it. It is important to keep your own records of all the income you receive during the year in case one of your income sources fails to file a 1099 or makes a mistake in the amount it specified on the form it did send. (If that happens, contact the source and request that it issue a corrected form 1099.)

For example, if you earn $500 in side income from tutoring through a tutoring agency, the tutoring agency might not issue a 1099-MISC because it is not required to do so for payments of less than $600. However, you are still required to report the $500 as income on your tax return.

To provide another example, if you own a small business and you hired an independent contractor to be your virtual assistant and paid him or her $10,000 over the course of the year, you should file a form 1099-MISC with the IRS to report this payment and give a copy to your assistant. He should report this income on his tax return. This is an example of a situation where an individual might need to issue a 1099 form.

You do not usually have to submit the 1099 forms you receive to the IRS with your own tax return, but you should keep them with your other tax records in case of an audit.

The Bottom Line

Because taxes are not withheld from 1099s, you should track income reported that way especially carefully and pay estimated taxes if needed. Alternatively, if you also have a job and fill out a W-4 form, you can have additional taxes withheld to cover your outside extra income. See Filling Out Your W-4 Form for information on how to do this.

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