It's easy to see IRS Form 1099 as representing a big liability since it reports income that hasn't already been taxed in the form of withholding.
Receiving a Form 1099 can be unpleasant because, unlike a Form W-2, it likely reports income that hasn’t been already been taxed in the form of withholding. So unless you’ve managed to set aside the appropriate portion of your income throughout the year, it’s easy to see the 1099 as representing a big liability.
Then again, “If you’re getting one, you made money,” said certified financial planner Sean Kelleher, co-founder and principal of Riverchase Financial Planning in Lewisville, Texas.
However, the 1099 can complicate your tax return, he said. Part of the complication is the task of keeping track of the various types of taxable income – there are 17 different versions of Form 1099 – and Kelleher said it’s common for people to receive five to 10 various 1099s in any year.
“The 1099 comes in many flavors, and the flavors are usually in the letters that come after the numbers,” said Jon Beyrer, a certified financial planner who is vice president of wealth management for Solana Beach, California-based Blankenship & Foster LLC. “There’s pretty much the whole alphabet.”
"Any expense you incur in the ordinary and necessary conduct of your business is going to be deductible."
- Keith Hall, tax adviser, National Association of the Self-Employed
Save time, get organized
The first step in dealing with 1099s is, simply, to get organized. Organize them by type and in the order they go in the tax return (print out Form 1040 for a guide); that will make entering them on your return easier. After you’ve gotten organized, Beyrer suggests taking time to make sure you’ve received every 1099 that should be coming to you to avoid facing penalties from the IRS for failure to report income.
Next, make sure you are the correct recipient of the forms. Kelleher said he’s run into cases of identity theft that resulted in people receiving errant 1099s for income they never received.
Also, verify the numbers. Form 1099-MISC, for example, shows payment you’ve received from clients or customers. Crosscheck these figures with check stubs and deposit slips.
Once you have all your items of income assembled, start thinking about deductions. There are different kinds of deductions that can be taken against different types of income, just as there are different rates of taxation. Beyrer notes, for example, that a penalty from a certificate of deposit withdrawal will show up on a 1099, but it is actually an adjustment to income and will lower your adjusted gross income (AGI).
Generally speaking, Form 1099-MISC is distinct from its counterparts because it deals directly with work income and reimbursed expenses. (Other 1099s pertain to dividends, interest and other investment income. Deductions are available for service fees related to investment income, such as those for accounting and other financial management but are reported elsewhere on the return.)
There are many types of deductions to consider if you receive a Form 1099-MISC, which is typically received by self-employed individuals and small-business owners. Keith Hall, a tax adviser for the Annapolis Junction, Maryland-based National Association for the Self-Employed, suggests keeping meticulous track of every single business expense, no matter how small. This includes office supplies and meals with clients. It also includes expenses that are easy to miss, even if you have a separate business account, including mileage of car trips to the office supplies store and restaurants.
“Any expense you incur in the ordinary and necessary conduct of your business is going to be deductible,” Hall said. “Pay attention to all of those types of expenses, whether they are meals, entertainment, office expenses, supplies – all those types of things.”
Opening a separate account for business is not only sound business practice; it can help you keep a clear record of taxable income – and tax-deductible expenses. This is especially important because in most cases the IRS expects to receive quarterly tax payments from self-employed workers, Hall said. There are at least two exceptions to this rule: if you owe less than $1,000 in taxes overall, or if other withholdings -- from a full-time job, for example -- cover 90 percent of your liability by April 15.
A portion of your living space is also deductible, so long as it's dedicated exclusively to business purposes, Hall said. Simply divide the square footage of your business space by your overall living space and use that ratio to determine what you pay each month for work space. And don’t forget to include utilities.
“A percentage of all the expenses you incur to maintain that residence will be deductible, based on that percentage," said Hall. "If you own the home, that includes mortgage interest, real estate taxes, insurance, repairs and maintenance."
The Fine Print
Persons who have never filed a tax return for income reported on any of the 17 variations of Form 1099 should review “1040 Instructions 2016” and study the content carefully before beginning to prepare their returns.
The table titled “Where To Report Certain Items From 2016 Forms W-2, 1097, 1098, and 1099” shows that for returns involving income reported on most versions of Form 1099, the use of Form 1040 is required.
Other documents that may be required include Form 4797, Form 6251, Form 6252, Form 6781, Form 8824, Form 8853, Form 8889, Form 8903 and Form 8949; and Schedule A, Schedule C, Schedule C-EZ, Schedule E and Schedule F. See also the instructions for Schedule SE.
The 17 versions of Form 1099 are:
- 1099-A Acquisition or Abandonment of Secured Property
- 1099-B Proceeds from Broker and Barter Exchange Transactions
- 1099-C Cancellation of Debt
- 1099-CAP Changes in Corporate Control and Capital Structure
- 1099-DIV Dividends and Distributions
- 1099-G Certain Government Payments
- 1099-H Health Coverage Tax Credit (HCTC) Advance Payments
- 1099-INT Interest Income
- 1099-K Merchant Card and Third-Party Network Payments
- 1099-LTC Long Term Care and Accelerated Death Benefits
- 1099-MISC Miscellaneous Income
- 1099-OID Original Issue Discount
- 1099-PATR Taxable Distributions Received From Cooperatives
- 1099-Q Payments from Qualified Education Programs
- 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. and IRA Contribution Information
- 1099-S Proceeds from Real Estate Transactions
- 1099-SA Distributions From an HSA, Archer MSA, or Medicare+Choice MSA
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