Did you know that employers deduct income tax from the paychecks and remit of their employees and report it to the IRS? If you’re an employee, you will receive an IRS Form W-2, Wage, and Tax Statement that will show you your wages and the amount of money withheld by your employer to you. You must file a copy of the W-2 with your income tax returns so that the amount of income you report will be compared to the amount your employer claimed they paid by the IRS.
For taxpayers who are self-employed, your compensation won’t have income tax withheld and the IRS will not give you a W-2 form. However, the IRS will still find out how much money you’ve made even if you didn’t receive a W-2 or no income tax withheld. The client must complete and file IRS Form 1099-MISC reporting the payments if the total of all the payments given to you by the client over the course of a year is $600 or more. The clients of those who are self-employed must complete and file a copy of Form 1099 together with the following:
• The IRS
• Your state tax office if there’s an income tax in your state, and
• you.
There are folks out there underreporting their income so the IRS made sure to identify them. The amounts listed on your 1099 Forms are being checked by IRS computers against the amount of income your report on your tax return. You’re in big trouble if the amount ends up to not become a match. The IRS will likely flag you for an audit. Your tax return and the 1099 forms don’t have to be filed together. You only need to keep them in your records.
By January 31st of the present year, all you 1099 forms for the previous year should already be given to you. The hiring firms you worked for must have your current address or else the forms might not arrive on time, sometimes not all. So you have to make sure they’re aware of your most present address. The amount of compensation your clients say they paid you must be checked in each Form 1099 against your own records to ensure that they are consistent. Remember to call the client immediately and request a correct Form 1099 if you see a mistake. Since 1099 are not due until February 28th (March 31st for electronic filing), the client may not have filed it to the IRS yet. If you happen to have filed 1099 to the IRS already, you may ask the client to send a corrected 1099 to the IRS. It’s for your best interest if you don’t let the IRS think you were paid more than you really owe. To show that it’s correcting a prior 1099 form, check that special box you will find in the 1099-MISC form.
Filing to file 1099 forms is very common among clients. Most of the times it is unintentional because the client may not understand the rules or may just want to neglect to file them. There are also clients who fail to file 1099 forms on purpose because they don’t the IRS to discover that they’re hiring independent contractors.
Now you may ask, “What will happen if I don’t receive 1099 from the hiring that has my correct address? Should I contact the firm and ask for it?” You actually don’t have to do that. Making sure that the 1099 forms are filed is not your responsibility but your clients’. Although the IRs will not impose a fine on the client by failing to file 1099, they may still impose a fine on the client or worst, severe penalties if the IRS audit discovers that the client should have classified you as an employee.
It is your duty to report all the self-employment income you earn every year to the IRS whether or not you receive a Form 1099. The IRS will examine your bank account as part of an audit to make sure you haven’t underreported your income. Taxpayers underreporting will have to pay back taxes, fines, and penalties.
Advanced Accounting & Tax Planning