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What is a 1099?

In the world of taxes there are many forms. Most are familiar with the basic forms but there are also ancillary forms that need to be filled out by businesses of all sizes. One of those forms is the 1099 form. It is used to report income earned by non-employees, investment dividends, and interest earned.

These forms are used by companies to report income that was paid out during the year to people other than their employees. For employees, the business will issue W-2 forms. They detail the amount of income made and the tax deductions withheld, including retirement account contributions. If insurance is an option, premiums deducted are recorded here as well.

Independent contractors are not employees of a company. They are contracted to do a specific job for the company. A business is not required to deduct taxes from their income or pay taxes for the contractor. But, the company does have a responsibility to provide the independent contractor with a record of their earnings so that they can file their own tax documents.

Businesses hire qualified independent contractors, or freelancers, to work for them because it is cheaper and lowers their overhead. A freelancer is not an employee so money for insurance, taxes and other benefits need not be paid. A contractor is responsible for figuring their taxes. Essentially, their business is to provide a service for your business.

The 1099-MISC form is completed by a business for each freelancer that they hire. Some do not send out a form for small earnings of less than $600. It is a good idea for every business to send out this form to all their independent contractors even if the amount paid is smaller than that required by law. A copy in your files is good business practice to track your expenses.

1099 forms are sent out for a variety of other reasons as well. The 1099-DIV form is used by mutual fund companies and brokerages to report dividends paid out to individuals. This is income that the person records on their tax forms when filing.

If you have a savings account or interest bearing checking account you will receive a 1099-INT form from your bank. This form reports any interest earned on the money that you have in your accounts. Typically it is only a few cents since savings accounts don’t earn much, but there is a place to record it on your tax forms so you need the information. No one wants Uncle Sam breathing down their necks for fifty cents!

Issuing a 1099 form for all of your contractors is a good rule of thumb no matter how much they have made. The form is further proof for the contractor of the money that they have earned the previous year. It is a courtesy to them and a responsibility for you.

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