If you were self-employed or worked as a freelancer or independent contractor in 2012, we’ll help you file your 1099 tax form for the 2013 tax season. Generally speaking, tax filers need to submit one for income that isn’t regular wages, salaries or tips. So, on top of freelance income, the 1099 must be filled out for interest, dividends, real estate proceeds, debt cancellation and plenty more. All in all, there are about 20 types of 1099s, each for a unique kind of income.
Perhaps the most common, though, is the 1099-MISC. It’s most often used by those aforementioned independent contractors, or, in the words of the IRS, a “business owner or contractor who provides services to other businesses”. In plain English, we’re talking about self-employed people.
As is the case with most tax forms, though, the requirements aren’t always so clear-cut; the answers are in the details, so it’s best we go ahead and dive in – while keeping this bigger picture in mind.
Businesses are required to send out 1099s by January 31, and the form will list all taxable income.
When it’s in your hands, you take a 1040 and fill it out with the information you’ve just received; you then have until the end of February to complete and submit to the IRS.
Who needs to fill out a 1099-MISC
Generally, the folks who fill out a 1099 will be freelancers, novelists, actors, artists, video editors – anyone who’s employed in a more informal capacity and often on a project-by-project basis.
More specifically, though, the IRS marks the following as 1099-MISC-mandatory:
- Income greater than $600
- Gross proceeds paid to an attorney greater than $600
- $10 or more in royalties or broker payments in lieu of dividends or tax-exempt interest
- Fishing boat proceeds
Yes, fishing boat proceeds. Clearly, the definition of “miscellaneous” income is a bit more open-ended that you might’ve thought.
If you do fit one of the above requirements and haven’t received a 1099, don’t panic. Because if you really did need to fill one out, you’d probably know; you would’ve received a letter in the mail.
The only exception: your address isn’t up to date with the issuer of your 1099, in which case you’ll have to speak to them about getting another copy.
If you’re still convinced that you have miscellaneous income to report, don’t bother requesting a 1099. Just include the requisite details on your federal tax return.
Consequences for you, the independent contractor
After filing, most taxpayers get a refund from the federal government.
You’re not quite as lucky, because of the following distinction: a business has separate obligations for 1) regular employees and 2) freelancers or independent contractors.
Both groups have to make contributions to federal funds like Social Security and Medicare. But, for the former, these contributions are deducted automatically while, for the latter, they’re not.
If you’re a regular employee, your place of work is obligated by law to withhold and make those contributions; it’s why your paychecks will list deductions for Social Security and Medicare even if you don’t use those services yourself.
Such is not the case for independent contractors, who have to pay out in full at the end of the year. They, too, contribute to those two federal programs, but by way of the self-employment tax.
That tax happens to weigh heavy on the self-employed, too: they’ll end up contributing 15.3% of their paycheck to Social Security and Medicare.
Regular employees? Half that: just 7.65%, because the employer foots half the tax bill – they match the employee’s contribution.
Meanwhile, independent contractors, who are, in a sense, both employer and employee, pay the full amount; they end up with a higher tax rate overall.
1099 and the self-employments tax: higher taxes are the price of independence
It’s not as if independent contractors are entirely the victim here, though. It’s really a matter of preference and how you like to work. If a freelancer enjoys the independence that comes with their job – even the ability to wear sweatpants day in and day out rather than a starched, stiff shirt – they can indulge themselves and a company cannot tell them otherwise (Herein we say “company” instead of employer, since, as a freelancer, you’re technically not an employee).
This distinction in employee compliance, between regular employees and independent contractors, isn’t just some informal rule of thumb; it’s quite literally written into law, in the IRS’s Notice 989.
Among its provisions is the following: if you’re an independent contractor, the company you work with can still tell you what to do. But what they cannot do is tell you how to do it.
In other words: there’s a trade-off, and it’s very much tangible: independence for higher taxes, served to you by the 1099-MISC.