So you finally got going on that side gig. You have picked up a few clients and the money has started coming in. Keep in mind, however, along with this additional cash comes some additional forms. As you go through your mail in late January, you may find a new tax form, the 1099-MISC. You look at it and wonder what this is and what you are supposed to do with it. This is just a form that a client will send you if they paid you at least $600 for the services you provided.
Usually, when you started working, or perhaps a bit closer towards the end of the year, your client sent you a form W-9, which asks you for either a Social Security Number or a Taxpayer Identification Number (TIN). They will use these numbers to report to the IRS the amount they paid you over the course of the year. While you can use your Social Security Number, I got a TIN to prevent my personal information from getting in the hands of someone who could use it for evil purposes.
If you did receive the 1099-MISC, there are several boxes you will want to look over before you use the information on your tax return.
The first thing you will notice when you look at the form is a box with the name of the person who sent it to you. You probably know all of your clients, but check your records to be sure you did work for the person who sent you this form. You will also see a box labeled RECIPIENT’S identification number. You will want to make sure that number is either your social security number or the employer identification number you were assigned when you registered your company with the IRS. You would have received this number when you registered your company online with the IRS, and you will see it on any letters from the IRS.
Let’s say your business involves you renting space to someone during the year. Box 1 of the 1099-MISC will show how much you received in rent payments. Normally, you would include this amount on Schedule E of your tax return. However, if you sold real estate as a business or you rent equipment or other items as a business, you would report these payments as sales on Schedule C of your tax return.
Did you receive any royalty payments during the year? These would come from any copyrights or patents you have, or the properties you own that contain oil, gas or mineral deposits. If so, Box 2 would show any amounts you received from owning these types of items. You would report these payments on Schedule E of your return.
Did you win any prizes and awards, like if you won money on a game show or playing bingo? Box 3 is where this type of income is reported. There should be a description included of what the payment is for, as well as the amount. You will use the description of the purpose of the payment to determine where this should be reported on your taxes. You probably wouldn’t have anything in this box for your business, but if there is something in there and don’t know what it is for, contact the person who sent it to you and ask them about it.
If your customer withheld any taxes (which they should not have if you gave them a correct Taxpayer Identification Number), box 4 will show this amount, which would go on the line for taxes withheld on your 1040. However, your client may have withheld taxes since you did not give a taxpayer identification number to them. Make sure you give a W-9 to your customer if they ask for it. You may even want to have one prepared to give to your customer when you send your first invoice. This will prevent them from withholding any funds shouldn’t have.
Box 7 is where you will most likely see a number most of the time if you did work for clients. This box will show how much was paid to you for the work you did for your client. Check your records to make sure this number jives with what they have paid you. You will report this amount on your tax return on the sales line on Schedule C.
If you sold products supplied to you, box 9 will be checked, but only if you were paid $5,000 or more. You will not only need to report your sales on the sales line of the Schedule C, but you will have some cost of goods sold to report on the same schedule. You will probably receive another notice from the company about the value of what you sold, but you should have this amount in your records.
You may have gone international and sold things overseas. Way to go! If this happens, and you had to pay foreign taxes, Box 11 will show the amount of foreign tax you paid, which you may be able to claim as a deduction or a credit on your tax return. In addition, Box 12 will show to which country the tax was paid.
When looking over your 1099-MISC, there are a few questions you want to ask:
- Did I actually do work for them? There have been instances where someone is trying to defraud the IRS by over reporting the amount in expenses they had, and sending a false 1099-MISC is one way they would do this. If you check your records and haven’t done work for them, contact them for an explanation.
- If you see that you had backup withholding on the form, check your records to see if you sent them a W-9 with your information. Call your client who sent you the form if you did send them a W-9 so they can adjust their records and send you a new form. Be ready to send them a copy of your W-9 so they have proof of what your number is.
Now that you are doing some freelance work, you should expect to be getting a form 1099-MISC. Make sure you understand what is on the form so you can properly report the information on your taxes. If you run into something you don’t understand, get in contact with your accountant, who is always happy to answer questions and help out people who need assistance with tax matters.
In accordance with Circular 230 Treasury Department Regulations, we are required to advise you that any tax advice contained in this article may not be relied upon to avoid penalties under the Internal Revenue Code. If you are interested in a written opinion that can be relied upon to prevent the imposition of tax-related penalties, please contact the author.