What is a 1099 Form — And Why Are They Important?
As you pull together all the documents you’ll need to prepare your federal tax return for the 2018 tax year, you may have received an IRS form 1099. But you might not be clear on exactly what this tax form is and why it’s important.
The following is an explanation of this federal tax form and why it’s important, as well as what you should do if you receive an incorrect form.
What is a 1099? The Simple Answer: An Income Reporting Form
Most employers are responsible for withholding federal income taxes from employees’ paychecks and distributing W-2 forms at the end of the year to let employees know how much money was withheld.
1099 forms are a record that an entity, person or institution other than your employer paid you money during the year. Personal Capital clients, for example, will receive a 1099 form for all investment income. You might also receive a 1099 form from your bank if you were paid interest during the year. The entities paying this income have a deadline of January 31st to send out 1099 forms, although institutions commonly request extensions to this deadline.
Types of 1099 Forms
Several different kinds of 1099 Forms are used to report different kinds of income, including the following:
This form is used to report taxable income paid to freelancers and independent contractors. If you earned at least $600 last year in freelance or contract income from any single entity, you should receive a 1099-MISC Form from that entity.
Forms 1099-DIV and 1099-INT
These forms are used to report dividends and interest income paid to owners of certain kinds of investments, such as mutual funds and bank savings accounts. However, they are not used to report income you received from selling securities.
This form is used to report government payments, such as state income tax refunds and unemployment compensation, made to individuals. Note that you only have to report state tax refunds as income if you claimed a deduction for state income taxes during a previous year.
This form is used to report withdrawals from certain kinds of retirement accounts, such as traditional IRAs, profit-sharing and pension plans, and annuities. It usually shows how much tax was withheld and the taxable amount of the distribution.
This form is used to report any debt cancellations made by creditors to debtors, which the IRS considers to be taxable income. For example, if your credit card issuer cancels your outstanding card balance, you should receive a 1099-C Form detailing how much debt was cancelled. You must report this amount as income on your federal tax return.
The party responsible for closing a sale of real estate on your behalf will be responsible for providing this form to you.
You receive this form if you took distributions from your HSA (Health Savings Account), Medicare Advantage, or Archer medical savings account.
Penalties for Failing to Report Income That Appears on a 1099 Form
Remember that the Internal Revenue Service will also receive a copy of your 1099 Form, so they are aware of all the income you received last year. This enables them to compare the income you report on your tax return with the income reported on your 1099 Forms.
If you fail to report 1099 income on your tax return, the IRS may assess penalties and interest retroactively back to the first day the tax payment was late. Late payment penalties are generally 0.5 percent for each month that taxes remain unpaid up to a maximum of 25 percent.
However, if the unreported income results in a “substantial understatement” of the total amount of tax you owe, the late payment penalty increases to 20 percent immediately. Unreported income is considered to be a “substantial understatement” if the tax on unreported income is more than $5,000 or 10 percent (whichever is greater) of the correct amount of tax that should have been paid.
Important note: The IRS doesn’t consider failure to receive a 1099 Form a valid excuse for failing to report 1099 income – so work with your financial advisor and CPA to ensure that everything is in order! All 1099 forms will have your social security number or tax identification number on them, so the IRS will know what your 1099 income is.
Examine 1099 Forms Carefully
Be sure to carefully examine any 1099 Forms you receive for accuracy. If a 1099 Form contains an error, contact the issuer immediately and ask them to reissue an amended form. Issuers must submit 1099 Forms to the IRS by February 28, so if you alert them before this date, they may be able to correct the form before sending it to the IRS.
It’s smart to keep a written record of all correspondence with issuers regarding incorrect 1099 forms in case a dispute arises with the IRS. If the issuer has already submitted the 1099 Form to the IRS, ask them for a corrected form, which includes a “corrected” box that should be checked to let the IRS know about the change.
What to Do if You Receive a Corrected 1099 Form
If you receive a corrected 1099 form, don’t panic! Revised 1099s are quite common and are issued if there is any change or discrepancy in the reporting of gains or dividends from any security in your portfolio. Usually it’s not the custodian who is causing a need for revision. However, they do need to issue corrected 1099s no matter what the difference of the corrected amount (revised 1099s can sometimes be issued over a few cents!)
The 1099 Form is an important tax document that you should pay special attention to. Be sure to speak with a tax professional if you have more questions about 1099 Forms and their impact on your federal tax return.
The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.
Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.