Whether you’ve been filing and paying for your income tax returns for years or are about to go through your first experience, the pressure that comes with handling copious amounts of tracking and balancing remains the same. Considering that the IRS enforces stringent standards, you’re most likely on your toes for any updates coming in the next few weeks.
By now, you’re probably immersed in your ITR preparation to the point where you already know most—if not all—of the tasks and details you’re dealing with. Amid all the different processes and details that you’ll come across this tax season, however, the chances are that there’s one question on your mind that will come sooner or later:
“How do I use my Form 1099 for my Income Tax Return?”
IRS Form 1099 explained
Every February, small business owners, start-up managers, freelance bookkeepers, and service industry businesses get an IRS Form 1099 in their mailboxes—a critical document that has a substantial impact on anyone’s tax life.
Technically speaking, this form is best defined as a record that professionals or businesses receive whenever they receive money from someone other than their employer. Given to both you and your clients or customers, form 1099 acts as the IRS’ tracking sheet which helps document your transactions and accurately sum up just how much tax you need to pay.
Are there various types of IRS form 1099s?
Compared to other kinds of documents that the IRS hands out, 1099s come in 16 different forms that correspond to different types of transactions for more accurate record-keeping and tracking. From Bond Tax Credits and Long-Term Care Insurance to dividends and tax deductions, there is a diverse list of specialized sub-types of this form for any kind of income that you receive!
If this is your first time to deal with a form 1099 for your ITR (or you simply haven’t gone into the details of it yet), here’s a quick rundown of the ten most common forms that you may need to deal with:
|This corresponds to partial or full cancellations made by mortgage lenders or a short sale of your home—both of which are classified as taxable income by the IRS.
|This corresponds to any form of income generated from the sale of several types of securities and bartering exchanges (that typically take place on websites).
|This corresponds to income generated after a specific amount of debt is forgiven by a lender or credit card issuer when the final payable amount is less than what is due.
|This corresponds to generated income (in the form of either cash, stock, or property) when a shareholder’s corporation undergoes a significant change in capital structure or is sold.
|This corresponds to dividends received from investments—however, this doesn’t include those generated from credit union share accounts.
|This corresponds to any form of income from the state, local, or federal government (such as a tax refund, credit, or offset).
|This corresponds to amounts of income over $10 in interest from a bank, brokerage or financial institution.
|This corresponds to income gained from long-term care insurance benefits.
|This corresponds to income that isn’t classified under other 1099 categories (this works as a catch-all section).
|Introduced in 2020, this classification corresponds to income generated from freelance activities, side gigs, or self-employment.
“Now, what do I do with my 1099?”
When you receive your 1099 form, there are two obligations you’ll need to take care of:
- Figuring out how much income you received during the tax year, regardless of where it came from, and;
- Determining what kind of income it was based on the available classifications according to the IRS’ set standards.
Once you receive your forms in February, you’ll have until the end of the month to gather everything and pass it back to the IRS for processing. However, it is worth noting that these forms will have your Social Security numbers or Tax Payer Identification Number (TIN) on them—which means that you have no room for inaccuracies on your returns.
Typically, 1099 forms themselves are straightforward because they outline data based on the information provided by your payers (or the documents that you issued in the past). Based on the expenses that you’ve incurred throughout your tax year, you’ll need to match everything up by cross-referencing expenses and verify just how much you need to pay for your ITR. Thankfully, you can also ease up the whole payment and filing experience with a few handy tips, such as:
- Verifying with payers to avoid errors: Whenever you have a form 1099 arrive in the mail, it is critical that you open and read them immediately to spot any mistakes that may either cause you to underpay or overpay. If you find that a form (or a handful of them) has incorrect information on it, you’ll need to contact the payer for a correction so that matters are sorted out with the IRS’ records.
- Enlisting a professional’s services: Although there are some parts of dealing with 1099s that you can handle on your own, ensuring that you get to pay the right amount based on the same forms for your ITRs is best left to the help of experts.
Interested in learning more about how we can help you best use your IRS form 1099 for more accurate statements on your Income Tax Return? Book a call with us today!