Those $%*#@ blankety-blank 1099s
In the financial world, January in the US is known as “1099 month.” Banks, brokerages, payroll services, and CPAs spend many hours preparing the documents. Taxpayers wait for them with mixed emotions, knowing they need the information to do their tax returns and at the same time dreading having to figure out exactly what numbers to report where.
The IRS loves 1099s.
There are lots of different types of 1099s. Some of the more common ones you’ve probably seen include
- 1099-DIV (dividends and distributions)
- 1099-INT (interest income)
- 1099-B (proceeds from broker and barter exchange)
- 1099-C (canellation of debt)
- 1099-G (certain government payments)
- 1099-R (distribution from persions and retirement plans)
- 1099-S (proceeds from real estate transactions)
As a self-employed business owner (or a single member LLC) filing a Schedule C, you’ll probably get 1099s from clients and customers showing how much they paid for your services. The form you’ll receive is the 1099-MISC and the dollars you earn as an independent contractor will be reported in Box 7 as non-employee compensation.
See the illustration above. That amount goes on Line 1 (gross receipts or sales) of your Schedule C. Sounds simple enough, right?
But there are some common questions (and misunderstandings) that I often hear about 1099s.
- What if I don’t get a 1099?
- What if the 1099 has the wrong amount?
- What if the income reported on the 1099 doesn’t all belong to me?
The critical factor in all these situations is what I mentioned earlier—the IRS loves 1099s. And while they might not do such a hot job all the time of matching K-1s and W-2s to individuals’ tax returns, they’re very good at matching 1099s. Their process might be extremely slow and you might not receive a letter or a notice about a 1099 mismatch until two years after you file your return, but the matching is something they work at very diligently.
It’s one of the easiest ways for them to identify the under reporting of income portion of the tax gap that I talked about here. So it’s absolutely essential for you to use the exact numbers from your 1099s on your tax return, even if they’re wrong.
Tomorrow, I’ll explain why and answer the FAQs, too.
