As a taxpayer, you probably hate receiving 1099s. If you're in business, you probably hate sending them out. In fact, no one likes 1099 forms except the IRS. The agency loves them because they allow its computers to keep tabs on ordinary taxpayers, even while it audits fewer than 1% of all individual tax returns.
The IRS matches nearly all 1099s and W-2 forms (those are the wage-report forms from your employer) against your 1040 form or other tax forms. If they don't match, it sends out what is called a CP2000 notice to taxpayers saying they owe more money.
To make sure this doesn't happen to you, here are 10 things you should know about 1099s.
- Form 1099 is used to report certain types of non-employment income to the IRS and there are many different types.
- The IRS matches 1099s with your tax return so if you fail to report one it will pursue you for taxes owed.
- The deadline to mail 1099s to taxpayers is Jan. 31.
- You are responsible for paying the taxes you owe even if you don’t get the form from a payer, so make sure to include those earnings in your tax return.
- If you receive an incorrect 1099 form and the payer has already sent it the IRS, ask them to send in a corrected form.
10 Things You Should Know About 1099s
1. Who Should Receive a 1099 Form
Form 1099 is used to report certain types of non-employment income to the IRS—such as dividends from a stock or pay you received working as an independent contractor. This time of year they're inevitable. Generally, businesses must issue the forms to any payee (other than a corporation) who receives at least $600 during the year. And that's just the basic threshold rule. There are many, many exceptions. That's why you probably get a 1099 form for every bank account you have, even if you earned only $10 of interest income.
2. There Are Many Varieties of 1099s
There is a dizzying array of 1099s. In fact, as of 2020, there are 20 types. There is a 1099-INT form for interest; 1099-DIV for dividends; 1099-G for state and local tax refunds and unemployment benefits; 1099-R for pensions and payouts from your IRAs; 1099-B for broker transactions and barter exchanges and a 1099-S for real estate transactions, to name a few.
While there are many categories, Form 1099-MISC seems to prompt the most questions and covers the biggest territory of non-employment income.
3. What If You Don’t Get All Your 1099s?
The most important thing to remember is that you are responsible for paying the taxes you owe even if you don’t get the form, so following up with the business might be a good idea. If the company submits a 1099 form to the IRS, but for some reason (see below) you don’t receive it, the IRS will send you a letter—actually, a bill —saying that you owe taxes on the income.
That letter could come as long as years later. If the business didn't file the 1099 form for you on the income, you should report it as a miscellaneous income. It might be worth asking a tax pro for other alternatives.
Taxpayers don’t include 1099s with their tax returns when they submit them to the IRS, but it’s a good idea to keep the forms with other tax records in case of an audit.
4. Stay on Top of a New Address
Whether or not the payer has your correct address, the information will be reported to the IRS (and your state tax authority) based on your Social Security number. That means you have an interest in making sure payers have your correct address. Update your address directly with payers, as well as putting a forwarding order in with the U.S. Post Office. You'll want to see any forms the IRS sees.
5. The IRS Gets Your 1099, Too
Any Form 1099 sent to you goes to the IRS too, often a little later. The deadline is Jan. 31 for mailing 1099s to most taxpayers, but some are due Feb. 16, others are due to the IRS at the end of Feb. Some payers do send them simultaneously to taxpayers and the IRS. Most payers mail taxpayer copies by Jan. 31 and then wait a few weeks to collect all of the IRS copies, summarize them and transmit them to the IRS, usually electronically.
6. Report Errors Immediately
The time delay means you may have a chance to correct obvious errors—so don't just put arriving 1099s in a pile—open them immediately. Suppose you get a 1099-MISC on Jan. 31 reporting $8,000 of pay, when you know you received only $800 from the company that issued the form? Tell the payer immediately. There may be time for the payer to correct it before sending it to the IRS. That's clearly better for you.
If the payer has already dispatched the incorrect form to the IRS, ask the payer to send in a corrected form. There's a special box on the form to show it is correcting a prior 1099 to make sure the IRS doesn't just add the amounts together.
7. Report Every 1099
The key to Form 1099 is the IRS' computerized matching. Every Form 1099 includes the payer's employer identification number and the payee's Social Security (or taxpayer identification) number. The IRS matches nearly every 1099 form with the payee's tax return.
If you disagree with the information on the form but you can't convince the payer you're right, explain it on your tax return. For example, suppose you received a $100,000 payment from your car insurance company to cover your medical expenses and pain from whiplash you suffered in an accident. Payment for personal physical injuries is excludable from income, and it shouldn't normally be the subject of a Form 1099.
If you haven't succeeded in convincing your insurance company to cancel the Form 1099, try to explain it on your tax return. One possibility is to include a zero with a "see note" on line 7a, the "other income" line of a 1040 form which is reported on line 8 of Schedule 1.
Then in the footnote, show something like this:
Payment erroneously reported by XYZ insurance on Form 1099: $100,000
Amount excludable under Section 104 for personal physical injuries: $100,000
Net to Line 7a: $0
There's no perfect solution but one thing is clear: If you receive a 1099 form, you can't just ignore it, because the IRS won't.
8. Don't Overlook a 1099 Form
No one likes a tax audit, and there are numerous tales about what will provoke one. But this much is clear: If you forget to report the $500 of interest you earned on a bank account, the IRS will send you a computer-generated letter billing you for the tax on that interest. If it's correct, just pay it.
9. Don't Forget State Taxes
Most states have an income tax, and they will receive all the same information the IRS does. So if you missed a 1099 form on your federal return, be aware that your state will probably catch up with it, too.
10. Don't Ask, Just Tell
Keeping payers advised of your current address is a good idea, as is reporting errors to payers. But that's where I'd stop. In other words, if you don't receive a Form 1099 that you expect, don't ask for it. If you are expecting a 1099 form, you no doubt know about the income, so just report that amount honestly on your tax return. IRS computers have no problem with that.
In my experience, if you call or write the payer and raise the issue, you may be buying trouble. The payer may issue the 1099 form incorrectly. Or you may end up with two of them, one issued in the ordinary course (even if it never got to you) and one issued because you called. The IRS computer might end up thinking you had twice the income you really did.