Unlike employees who receive a W-2 from their employer each January, freelancers tend to receive a 1099-MISC form from clients who have paid them more than $600 in the previous year (or more than $10 in royalties or broker payments). If you are a sole proprietor or have a single-member LLC, you’ll use 1099 forms to report your income and make tax payments on your individual return, using Schedule C (or Schedule E for real estate-related income). The 1099-MISC is for miscellaneous income and is most common for independent contractors. It covers the widest definition of income.
By now, you should have received all of your 1099-MISC forms because companies are required to send them out by Jan. 31, and report them to the IRS by the end of February. (Remember, you won’t receive one if you billed less than the amounts specified above.) However, if you were expecting to receive a 1099-MISC form but didn’t, it’s not the end of the world. The IRS does not require you to attach 1099-MISC forms to your return, but it does expect you to pay taxes, whether or not you received a form. If you track your income throughout the year, you can still calculate how much you owe without a 1099-MISC, and the forms the IRS receives should match up to your reported income.
What NOT to Do
If you don’t receive a 1099-MISC when you were expecting one, your natural instinct might be to contact the payer to remind them to send it to you, but according to Forbes, you may be inviting trouble. A payer may issue more than one form, causing the IRS to think you received more income than you did. Or, the payer may make a mistake when issuing you a new 1099. As the article’s author points out, you can just report the income without a 1099-MISC, and potentially save yourself some hassle. A mistake on a 1099-MISC could increase your audit risk; if you estimate your payment to be higher and pay taxes on the higher amount, the IRS is just fine with that – it’s more concerned with underpayment.
Tips to Ensure Receipt of an Accurate, Timely 1099
Most payers will request a W-9 form from a freelancer or contractor at the start of the relationship. This is to ensure that the IRS has the correct information on file for you. It also helps payers know where to send the 1099-MISC in January. Even if a payer doesn’t request a W-9, make it a regular business practice to include one with your first invoice, and be sure to provide an updated version if you change addresses.
Also, when you receive a 1099, don’t just put it in a drawer until you do your taxes. Check the 1099 against your records, and if the two don’t jibe, contact the payer to ask for a corrected 1099. If the payer has not yet filed the 1099 with the IRS, ask that they destroy the incorrect one and issue a new one, and request that they file the new one with the IRS.
If it seems like a lot of work on your part to avoid mistakes by your payers, you’re correct. But payers have an incentive to do the right thing, because the IRS can penalize companies who don’t provide timely and accurate 1099 forms to payees.
It definitely pays to understand your tax situation and to consider ways to mitigate your tax bill through careful planning. At AMDG Financial, we integrate tax, financial, and investment strategies to provide our clients with a holistic view of their financial health. In addition, we invite potential clients to see us at work before deciding whether to hire us. Our process includes a series of complimentary meetings, in which we learn more about you, and explore the opportunity to work together. If you’ve been thinking about working with a financial adviser, feel free to schedule an appointment to see if we’re a fit. It would be our privilege to serve you.