As an independent contractor, you know the path to financial success is littered with obstacles -time management, the needs of multiple clients and tax responsibilities. While we can’t help with the soft skills of being a freelancer, we know about taxes. And this article is about demystifying 1099 forms – stating their purpose and their tax implications for you as an independent contractor.
Whether you’re a seasoned freelancer or just starting in the gig economy, understanding 1099 forms is not just beneficial but critical for your financial well-being.
A General Understanding of 1099 Forms
The 1099 form helps determine your tax liability as someone who is self-employed. Essentially, it is a document that reports income received outside of traditional employment, noting for both you and the IRS the earnings you need to include in your tax return.
There are different types of 1099 forms like 1099-B, 1099-C, 1099-DIV and 1099-R. Each serve a specific purpose. For example, Form 1099-B is issued to brokers to document the sales of individual stocks, and 1099-R is relevant to retirement rollovers and distributions.
1099-NEC for Independent Contractors
But as an independent contractor, the most common one for you is 1099-NEC, which stands for nonemployee compensation. Prior to 2020, 1099-MIS was widely used for freelancers. It is designed to collect information about miscellaneous payments totaling more than $600 for the year. But in 2020, the IRS issued 1099-NEC for specific use by independent contractors and is the 1099 form most pertinent to your self-employed status.
Expect to receive 1099 forms from your contracted customers by late January or early February for the work completed the previous year. Businesses paying you for work or consulting will be getting their tax returns ready for Tax Day in April and will need your 1099 to finish their returns.
Form W-9 for Independent Contractors
Not to confuse you, but you should know a bit about the W-9 too. To be issued a 1099 as an independent contractor, your payer will likely ask you to complete a W-9 first, especially if this is the first time working for the payer and they expect to pay you more than $600. The W-9 is an official request for your business information and tax identification number so that your 1099 can be issued correctly.
Tax Implications for Independent Contractors
Independent contractors face unique tax considerations compared to traditional employees. As someone who is self-employed, you have a chance to leverage deductions and write-offs to optimize your tax liability. Strategic tax planning throughout the year allows you to make the most of available opportunities for financial success. (Here’s why a tax planning meeting can be beneficial for you.)
Morgan & Associates Can Answer Tax Questions for Independent Contractors
Understanding the importance of a 1099 is only a piece of the puzzle. As a freelancer, you juggle a lot of tasks. If taxes feel like a huge burden or too complicated to understand in your limited time, let’s talk. Use the form below or the chat box to schedule a time.
We work with many independent contractors just like you and can answer all your questions – from 1099 forms to deductions to planning ahead for next tax season.