You've received a mysterious document with the number "1099" on it. There are some intriguing letters after the number--"INT," "MISC," "SA" or something else. If you've never encountered one of these important pieces of paper, you need to know what that number and those letters mean.
If you are part of the growing number of people who are telecommuting or making extra money on the side from a hobby or interest, you need to understand what a 1099 means to you. If you receive interest income or have paid interest, you need to know the implications. You have now entered The 1099 Zone.
Function
The Internal Revenue Service designed the 1099 tax forms for ease in tracking financial transactions. In a nutshell, 1099s give the IRS a means of capturing a snapshot of the more nontraditional financial events in the economy so the agency can adjust its books accordingly. Our changing economy has seen the growth of the self-employed or contract worker. These workers do not fall under the general guidelines for traditional employees who work at a documented hourly or salaried rate.
Types
There are 12 types of 1099 forms. The following are the most commonly encountered: 1099-MISC for contractors and freelancers; 1099-INT for interest income; 1099-OID for original issue discount received, usually from transactions related to mortgages served by the Federal Housing Authority; 1099-DIV for dividends payable to holders of mutual funds, brokers or investment firms; and 1099-SA to deduct distributions from a medical or health savings account.
Features
It is common to think that receiving a 1099 means you owe Uncle Sam some income tax. However, receiving a 1099 does not necessarily mean that you owe taxes; it means only that the information included must be reported on your income tax forms. Whatever your reason for receiving a 1099, the forms all resemble one another. Only the letters in the suffix vary to identify what kind of transaction has been recorded by the IRS.
Considerations
It is important to be absolutely certain of the type of 1099 you receive. You will need this information at tax time. If you had to move out of your home because of a mortgage issue, a 1099-A will record your abandonment of the property. Check with a tax professional for the particular guidelines.
A contract or freelance worker is issued a 1099-MISC if he earns $600 or more. Each time the contractor performs works for a different client, the 1099 "clock" is reset. Therefore, it is likely that a freelance worker will receive several 1099-MISC each year. If you receive a 1099 and do not understand its use or implications, ask a tax professional.
Warning
File any 1099s you receive and keep them for several years. They provide concrete proof of the types of transactions that took place during a particular tax year. Do not forget to include any income reported on Form 1099-MISC on your income tax if you are self-employed. If your tax return is flagged for an IRS audit, you will need all the supporting documentation at your fingertips.
