taxes. Yes, we can hear your collective moans from here.
Let’s face it: very few freelancers look forward to tax time. With so much math, documentation, and a seemingly endless avalanche of paperwork, it’s certainly enough to give us all a headache.
It’s always smart to contact a professional who can help you navigate those murky tax waters. However, it’s also a great benefit if you do some homework and gather some knowledge for yourself (plus, it’ll save you the embarrassment of looking totally out-of-the-loop when you’re to do finally sitting down with your CPA!).
For starters, let’s discuss something basic: the 1099 form. As a freelancer, you’re on the receiving end of many of these. So it is important that you understand their purpose and also know how to handle it properly.
What is a 1099 form?
Chances are you are already familiar with this form. But if you’ve ever wondered what exactly a 1099 form is – without getting very confused by all that legal mumbo jumbo – let’s break it down simply:
When you have a traditional job, you will receive a W-2 from your employer. This form provides information about your wages and salary information, as well as the amount you paid in state, federal, and other taxes throughout the year, withheld directly from your paycheck. The IRS requires this information to be reported by employers.
But as a freelancer you obviously don’t have just one employer to report on your income and taxes paid. This is where the 1099 form comes into play.
This form (there are actually many different types – more on that later!) is used to report other types of income, whether that’s interest earned in a bank account or – you guessed it – money you’ve earned from your freelance – and consultancy work.
“Form 1099s is a tool the IRS uses to estimate the total revenue paid to businesses,” explains Rebecca Norris, CPA, in a post on the JPMS Cox Accountants and Consultants blog: “They can help the IRS ensure that business owners don’t under-report their earnings for income tax purposes. Filing a 1099 also provides supporting documentation for charges withheld from the filer’s tax returns.
Read more: What is a 1099 form?
What you need to know about 1099 forms
Okay, so now that you know that these forms actually serve an important purpose (and aren’t just another cruel way for the IRS to make your life that much harder), what else do you need to know about them?
Let’s talk about some things to keep in mind when dealing with your 1099 forms.
1. You need them to archive correctly
Let’s start with the most obvious point: you’ll need these forms when you file your tax return. Any customer who has paid you more than $600 throughout the year owes you a Form 1099 so that you can appropriately report the income and pay taxes on it. And consider this your fair warning: While customers don’t have to submit a 1099 below that $600 threshold, you’re still required to report the income (we know — life isn’t fair).
Companies must submit these forms no later than January 31 for the previous calendar year, meaning you should have all of your forms ready by early February. Unfortunately, many companies still send them late in the mail, despite the fines they have to pay for doing so.
So, what happens if your customer fails to send you one at all? You might be tempted to reach out and request one. However, many experts warn against that tactic.
“If you don’t receive the Form 1099 you expect, don’t ask for it,” warns Robert Wood in his article for Forbes“If you call or write the payer and bring up the issue, you can get two, one spent in the normal course (even if it never reached you), and one spent because you called.”
This can just add a whole extra layer of confusion to things. So instead, you should just plan to still report income whether you have a 1099 to reference or not.
2. You Must Report All Earnings To Avoid A Headache (Even Without A 1099)
Which brings us straight to our next point. You absolutely must declare all your income. Yes, even if it’s less than $600 and even if you didn’t receive a 1099 form from that customer.
Why? Well, because that money is still taxable income that the IRS needs to know about. And, even further, it’s the ethical thing to do as a freelancer. Remember, the customers who paid you over $600 all year round could be in trouble if it’s discovered they didn’t give you a 1099 — and you don’t want to end up in that boiling boat with them.
When in doubt, report every last cent you earn. Yes, it can hurt to have even more taxes deducted from your hard-earned paycheck. But in the end, that honest approach will save you far more headaches than it causes.
3. You must request to fix any 1099 errors
You start getting your 1099 forms in the mail and — instead of opening them right away — tossing them all in a pile on the corner of your desk to deal with later. While we admire your somewhat organized method of keeping these all together, it’s best if you take a few minutes to check each document as you receive it to make sure they’re flawless.
Believe it or not, your customers aren’t perfect – they will make mistakes here and there too. And you’d rather find out now that your last name is misspelled or your address is wrong (if you still have time to fix it!) than the night before you have to submit everything.
And yes, you should absolutely ask your client to fix any errors on your 1099 form. If the customer has not already submitted the form to the IRS, they should be able to make the change, destroy the incorrect form, and then submit the correct form.
However, if the customer has already submitted the incorrect form, they must go through the steps to correct it with the IRS, which usually involves the simple step of preparing a new form and checking the “CORRECTED” box.
4. Your social security number is the key
While the above is undoubtedly important and you should make it your goal to make sure every bit of information on your 1099 form is correct, here’s the most important thing to remember: It’s all tied to your Social Security Number, making that the most is a crucial part. of information on these forms (so yes, check four times on each form you receive!).
“Your name and address are important, but Forms 1099 are really managed by your Social Security number,” explains Robert Wood in a separate piece he wrote for Forbes“Even as a publisher your old addressthe information will be reported to the IRS (and your state tax authorities) based on your Social Security number.
So the bottom line? Make sure these numbers are correct. They are important!
5. You must have the correct type of form
Did you know that there is a huge variety when it comes to 1099 forms? That’s right, there’s a whole range to choose from.
But don’t start breathing into a paper bag just yet, thinking you now have to sift through even more impossible-to-read requirements to figure out what exact shape you should receive. We’re making it easy: Freelancers should receive Form 1099-MISC from clients, which is used to report miscellaneous earnings.
Other 1099 forms include 1099-C, which is used to report debt forgiveness, and even 1099-S, which describes payments from real estate transactions, among many, many other types of 1099 forms. But as a freelancer, you only have to deal with 1099-MISC.
If a customer somehow gets confused and sends you another type 1099? You want to ask to have that corrected.
Let’s face it: no freelancer will ever start his or her happy dance at the thought or mention of taxes† The process is taxing at best (yes, pun very much intended).
With seemingly endless confusion, paperwork and painful quarterly payments (we have a handy quarterly tax calculator Bot to help with that!), managing your taxes as a freelancer is enough to inspire you to just lay your head on your desk until it all magically disappears.
But as you know, that’s not exactly the smartest tactic. Instead, the best thing you can do is stay informed, stay organized, and tackle your taxes.
And when in doubt, don’t hesitate to enlist the help of a tax professional to guide you through it. Yes, it will take a little money out of your pocket. But the blood, sweat and tears it will save you is well worth it. Besides, the best part? The costs of that appointment are tax deductible for you! We call that a freelance victory.