The 1099-MISC form reports the total amount of payments you receive from a single person or entity during the year you've provided services to them.
The IRS requires any person or company that makes certain types of payments to report them on a 1099-MISC to the recipient and the IRS. This informational form covers a wide range of payments you receive, such as rent, royalties, prizes and awards and substitute payments in lieu of dividends. However, the most common use of the form is to report your earnings when you work as an independent contractor, such as a freelance writer.
Information on the 1099-MISC
A 1099-MISC form serves a similar purpose to an independent contractor as a W-2 does for to an employee. The form reports the total amount of payments you receive from a single person or entity during the year that you provide services to. It includes some of your personal information such as name, address and either your Social Security number or employer identification number. Most importantly, it will classify each type of payment in separate boxes on the form depending on the reason for your payment. Generally, if you receive payment for contract work you do, then your annual earnings will appear as nonemployee compensation.
Who is responsible for preparing a 1099-MISC?
Depending on how many different companies or people you receive payments from during the year, you may receive more than one 1099-MISC. Each payer must complete the form if during any year it pays you $600 or more. However, if you earn only $500 from a company, you still must report your income even though you might not receive a single 1099-MISC. In most cases, the payer must provide you with a copy of the form by January 31 of each year, as well as a copy to the IRS by the last day in February.
What to do with a 1099-MISC
As an independent contractor or freelancer, you report all earnings on your income tax return just like an employee does, but you do it in a different way. You are considered self-employed and need to report 1099-MISC income on a Schedule C attachment to your tax return.
In addition, you are also liable for Social Security and Medicare taxes, which you calculate on Schedule SE and attach to your return.
Advantages of receiving a 1099-MISC
There are some tax advantages to earning nonemployee income on a 1099-MISC. One benefit is that you have more freedom than an employee to claim deductions that relate to your profession.
For example, if it’s necessary to use a computer to complete your work, you usually have the ability to claim a deduction for it. Furthermore, since you are not subject to withholding, you must make estimated tax payments throughout the year. But since you can calculate precisely what you owe, you can insure that you don’t pay too much in income tax during the year. You can use TurboTax to do the calculations for you, or get a copy of the worksheet accompanying Form 1040-ES and work your way through it.