What is a 1099 form?

Now, set the record straight, a 1099 is an official IRS form used to report total amounts of revenue or earnings gained within the calendar year. There are a few variants to the standard 1099 such as:

  • 1099-K
  • 1099-DIV
  • 1099-INT
  • 1099-NEC
  • 1099-MISC

These are just a few examples to reference. You will get these different reports when you start to engage in different financial investments. The most common variant of 1099 is the 1099-INT form which shows how much interest you’ve earned on a savings account for that year. May seem like a very small amount but with interest income, being another form of income stream, this could be significant if you scale it up!

So, why do we need 1099s?

To make a long story short, 1099s help you organize any compensation you may have earned outside of your normal “9 to 5” job. Again, with the example above using the 1099-INT, you may have been transferring money into a savings account all year and while you do a good job checking the balances and making sure to replenish what you withdraw, tracking interest may be difficult especially if the market changes. The banks do this for you and issue the 1099 document at the end of the year.

Another example is if you are an affiliate marketer and you’ve had a stellar year marketing dozens of products for multiple companies. You’ve done your best tracking your earnings and when you receive the 1099 forms from the companies you represented you can double check your final numbers and contact the issuing company if there are any issues with your information.

Finally, if everything was received correctly and there are no issues to deal with, you can add all of this together for your personal 1040 tax return.

Contractors vs Employees

Are businesses required to issue 1099s? Most financial institutions will handle tracking and issuing of most 1099 forms but it depends actually, if your business needs to issue one. First, you need to determine if this individual is an employee. If the company has no outside labor for additional help then the answer is no, because you will be issuing a W2 instead at the end of the year. But if you have a number of non-employee workers that help your business then you may want to consider tracking their earnings for possible 1099s.

One of the biggest issues the IRS has with 1099s is to determine if your contractors are actually employees. Why is this a big deal? Well, you aren’t paying payroll tax for contractors since they aren’t your employees and because of that many business owners have used this fact to get around paying that tax which, of course, is illegal. Best situation is to keep yourself honest both to your employees and to the IRS. Here’s how to determine if your contractor should be classified as an employee:

  • The individual turns in both an I9 and W4 forms for tax withholding.
  • The individual wears your company uniform while working.
  • The individual will take periodic breaks.
  • The individual will use a time-tracking sheet to track their hours worked and submit for payroll.
  • The individual is able to earn benefits, overtime, bonuses and more.

You should have an idea of how 1099s work and how they are determined for issuance. If you have employees, remember to pay tax and issue W2s at the end of the year. Contractors are liable for their own tax liability but you, as the company, must issue a 1099 if over a certain threshold. There’s a bit more to learn on 1099s for business owners but now’s the time to ask questions to your accountant or tax advisor in case you don’t understand or if you’re still unsure about these forms. These tasks are well within our wheelhouse so don’t be afraid to ask for help!