Taxes. Yes, we can hear your collective groan from here.
Let’s face it—very few freelancers look forward to tax time. With so much number crunching, documentation, and a seemingly endless avalanche of paperwork involved, it’s definitely enough to inspire headaches for all of us.
It’s always smart to connect with a professional who can help navigate you through those murky tax waters. However, it’s also a great benefit if you do some homework and gather some knowledge for yourself (plus, it’ll save you the embarrassment of seeming totally out-of-the-loop when you do finally sit down with your CPA!).
To get started, let’s touch on something basic: the 1099 form. As a freelancer, you’ll be on the receiving end of a lot of these. So, it’s important that you understand their purpose, as well as how to deal with them correctly.
What is a 1099 Form?
Chances are, you’re familiar with this form already. But, if you’ve ever wondered what exactly a 1099 form is—without being sorely confused by all of that legal mumbo jumbo—let’s break it down simply:
When you work a traditional job, you receive a W-2 from your employer. This form details your wage and salary information, as well as the amount you paid in state, federal, and other taxes throughout the year—which were withheld directly from your paycheck. The IRS requires that this information be reported by employers.
But, when you’re a freelancer, you obviously don’t have just one employer to report on your income and your taxes paid. This is where the 1099 form comes into play.
This form (there are actually numerous different types—more on that later!) is used to report other types of income, whether that’s interest earned from a bank account or—you guessed it—money you earned through your freelance and consulting work.
“Form 1099s are one tool that the IRS uses to estimate total revenue paid to businesses,” explains Rebecca Norris, CPA in a post on the JPMS Cox Accountants and Consultants blog, “They can help the IRS to ensure that business owners do not underreport their earnings for income tax purposes. Filing a 1099 also provides supporting documentation for expenses deducted on the filer’s tax returns.”
What You Need to Know About 1099 Forms
Alright, so now that you know that these forms actually serve an important purpose (and aren’t just yet another cruel way for the IRS to make your life that much harder), what else do you need to know about them?
Let’s touch on some things that you should make sure to keep in mind when dealing with your 1099 forms.
1. You Need Them to Properly File
We’ll start with the most obvious point first: You need these forms when filing your taxes. Any client who has paid you over $600 throughout the year owes you a 1099 form so that you can adequately report the income and pay taxes on it. And consider this your fair warning: While clients aren’t required to submit a 1099 under that $600 threshold, you are still required to report the income (we know—life’s not fair).
Businesses are required to mail out these forms by January 31 for the previous calendar year, meaning you should have all of yours in hand by early February at the latest. Unfortunately, many businesses do still mail them late—despite the penalties they face for doing so.
So, what happens if your client fails to send one to you at all? You might be tempted to reach out and request one. However, many experts warn against that tactic.
“If you don’t receive a Form 1099 you expect, don’t ask for it,” warns Robert Wood in his article for Forbes, “If you call or write the payer and raise the issue, you may end up with two of them, one issued in the ordinary course (even if it never got to you), and one issued because you called.”
This can just add a whole additional layer of confusion to things. So, instead, you should just plan to still report the income—whether you have a 1099 to reference or not.
2. You Should Report All Income to Avoid Headaches (Even Without a 1099)
That brings us right into our next point. You absolutely should report all of your income. Yes, even if it’s under $600 and even if you didn’t receive a 1099 form from that client.
Why? Well, because that money is still taxable income that the IRS needs to know about. And, even further, it’s the ethical thing to do as a freelancer. Remember, the clients who did pay you more than $600 throughout the year can find themselves in hot water if it’s discovered that they failed to provide you with a 1099—and you don’t want to end up in that boiling boat with them.
So, when in doubt, report every last penny you earn. Yes, it can hurt to have even more taxes taken out of your hard-earned paychecks. But, in the end, that honest approach will save you many more headaches than it causes.
3. You Should Request to Fix Any 1099 Errors
You begin receiving your 1099 forms in the mail, and—instead of opening them right away—you toss them all into a pile on the corner of your desk to be dealt with later. While we can admire your somewhat organized method of keeping these all together, it’s better if you take a couple of minutes to check over each document as you receive it to ensure that they’re error-free.
Believe it or not, your clients aren’t perfect—they’re bound to make mistakes here and there too. And, you’d rather discover now that your last name is spelled wrong or your address is incorrect (when you still have time to fix it!) than the night before you’re due to submit everything.
And, yes, you absolutely should request that your client fix any errors on your 1099 form. If the client hasn’t already submitted the form to the IRS, they should be able to make the change, destroy the incorrect form, and then send in the correct one.
However, if the client has already submitted the incorrect form, they’ll need to go through the steps to correct it with the IRS—which typically involves the simple step of preparing a new form and checking the box marked “CORRECTED”.
4. Your Social Security Number Holds the Key
While the above is undoubtedly important and you should make it your goal to ensure that each piece of information on your 1099 form is correct, here’s the most crucial thing to remember: It’s all tied to your social security number, making that the most critical piece of information on these forms (so, yes, quadruple-check that on every single form you receive!).
“Your name and address are important, but Forms 1099 are really controlled by your Social Security number,” explains Robert Wood in a separate piece he authored for Forbes, “Even if an issuer has your old address, the information will be reported to the IRS (and your state tax authority) based on your Social Security number.”
So, the bottom line? Make sure those digits are correct. They’re important!
5. You Should Have the Correct Type of Form
Did you know that there is a huge variety when it comes to 1099 forms? That’s right—there’s a whole assortment to choose from.
But, don’t start breathing into a paper bag quite yet thinking that now you have to sift through even more impossible-to-read requirements in an attempt to figure out which exact form you’re supposed to receive. We’ll make this easy on you: Freelancers should receive Form 1099-MISC from clients, which is the one used to report miscellaneous income.
Other 1099 forms include 1099-C, which is used to report the cancellation of debt, and even 1099-S, which details payments from real estate transactions—among many, many other types of 1099 forms. But, as a freelancer, you only need to be concerned with 1099-MISC.
If a client somehow gets confused and sends you a different type of 1099? You’ll want to ask to have that corrected.
Wrapping 1099s Up
Let’s be honest—no freelancer is ever going to bust into his or her happy dance at the thought or mention of taxes. The process is taxing at best (yes, pun very much intended).
With seemingly endless confusion, paperwork, and painful quarterly payments (by the way, we have a handy calculator to help with that!), managing your taxes as a freelancer is enough to inspire you to just lay your head down on your desk until it all magically goes away.
But, as you know, that isn’t exactly the smartest tactic. Instead, it’s best to get informed, stay organized, and tackle your taxes head on.
And, when in doubt, don’t hesitate to enlist the help of a tax professional to guide you through it. Yes, it’ll require a little bit of money out of your pocket. But, the blood, sweat, and tears it saves you will be more than worth it. Plus, the best part? The cost of that appointment is a tax deduction for you! We call that a freelance win.