Making mistakes on your 1099s can have far-reaching consequences from hefty fines to full audits. Be sure you’re reporting the right income this tax season.
“Happy tax season!” said… no one, ever. Tax refunds are awesome, but puzzling through tax paperwork is less awesome, especially if you’re an independent contractor. Small business owners and contractors have more complicated returns than an average employee. One of the most common documents is a 1099. Though the 1099 is conceptually simple, it can cause a whole host of problems if filed incorrectly.
1. File a 1099? Easy peasy! But wait… which 1099?
Most people believe that a 1099 is a straightforward piece of tax paperwork. And for the most part, they’re correct. The problem isn’t with the 1099 itself, but with how many versions of it there are. Every 1099 serves a slightly different purpose, and using the wrong form is one of the most common 1099 mistakes.
The Many Types of 1099
There are a whopping 16 varieties of the 1099 document. They cover everything from the acquisition of secured property to the income from interest. Explaining every single one would get exhausting, but most business owners will only contend with a few each year.
If you receive more than ten dollars in interest from a bank or other financial institution, this institution will send you a 1099 to report your interest income.
You have to file this form if you own securities or stocks and have received more than ten dollars worth of dividends throughout the year.
If you paid an independent contractor a minimum of $600 during the fiscal year, you have to file this form. If you were the independent contractor, you should receive a copy from your client.
This form is for business owners whose businesses processed a minimum of 200 transactions with minimum sales of $20,000. These sales must have been processed by exterior payment processors like Google Checkout and PayPal.
Mutual fund companies and brokers file this tax form if you sell your stock. It provides information regarding the date and amount of the sale.
If you’ve received unemployment compensation, this is the form you’ll use to report it. You’ll also report tax refunds from local and state income tax, along with taxable grants and agricultural payments.
This form is for people who receive distributions from their retirement plans.
2. Sure, I bought that for my business, but does it really count?
Another one of the most common 1099 mistakes is failing to write off your business expenses. Independent contractors have a good deal of leniency regarding their business expenses. You can write off the costs of commuting, along with other costs. If you don’t adequately itemize your expenses, you’ll end up paying hundreds or thousands more than you need to.
3. I’ve got all my important receipts right here… uh, under a greasy pizza box and a spilled soda.
You can be the most meticulous person in the world when it comes to listing your business expenses. But it doesn’t mean anything if you don’t have proof to back it up. Many people who report income on 1099 don’t realize that the IRS requires proof of receipts.
If the IRS asks for proof of the business expenses in your income on 1099, and you’re unable to provide it, you’ll be in hot water.
4. You have to pay taxes quarterly instead of throwing all your money at the IRS in one go? But everyone says to take the lump sum in the lottery!
Sure, the lump sum is financially sound if you win the lottery. But similarly to many businesses, the IRS prefers a steady yearly income instead of a lump of cash at the end of the year.
If you think you’ll owe more than $1,000 total in taxes, you’ll have to make a quarterly payment. Failing to make quarterly payments can result in fines.
5. I made one call to my client on my personal cell phone, so that means it’s a business expense, right?
Even though contractors have more freedom than other workers when it comes to business expenses, you can’t write every single thing off. If you bought something for personal use, but just happened to use it for your business, you’re toeing a thin line.
Before you write it off, consider: Is it believable that you truly did buy the item for your business alone? If that’s the case, you can probably get away with writing it off. If not, you may end up needing to seek 1099 help to correct 1099.
6. What do you mean, expenses can’t be in two places at once?
Another one of the most common 1099 errors is writing off the same expense multiple times. You’d be surprised by how often this happens, resulting in the need to correct 1099.
Most commonly, you see this issue crop up with car expenses. The majority of people adhere to the Standard Mileage Rate, which assumes that every mile of travel costs about 54.5 cents. This rate includes your gas expenses, maintenance, repairs, registration, insurance, lease payments, and depreciation.
Many people don’t realize that the Standard Mileage Rate includes all car expenses, rather than just gas mileage. They’ll use the rate to exempt their mileage, but they’ll also include receipts for repairs and maintenance.
You have to choose a single method of expense reporting. If you mistakenly report expenses twice, the IRS may believe you’ve committed tax fraud.
7. I have no idea what income I should be reporting, and at this point I’m too afraid to ask.
You can find a comprehensive list of 1099s, the minimum income amount to receive said 1099, and the date by which you should get it here.
The most important takeaway is that pretty much all of your income can be found on a 1099. If you’re an investor who makes money through stocks and dividends, there’s a 1099 for that. If you’re an independent contractor who works for multiple clients, you’ll get a 1099 from each individual client.
As an independent contractor, you’re not responsible for creating the 1099s. Instead, 1099s regarding your income will be sent to you by clients, financial institutions, brokers, and other relevant parties. These parties will file the 1099s in their own tax returns. The IRS will then double check that their reported income matches your reported income.
Once you’ve received all of your 1099s, you’ll add up the total income to get your taxable income for the year. From there, it’s a matter of making the right deductions and exceptions for your circumstances.
- Keep the 1099s you receive organized, since adding them up gives you your total taxable yearly income
- Make sure you have receipts of all business expenses, including travel
- Don’t write expenses off frivolously or you could be suspected of tax fraud
- Double check that you haven’t made common errors with 1099 help from helpful online tools
As long as you keep your tax documentation and receipts organized, you shouldn’t run into any problems. If you’re issuing any 1099s, make sure you use the right form. If you’re receiving them, make sure your own tax documents match the numbers on your issued 1099s.
By Katherine M.