The 1099 is a very common form in the small business world. Many owners issue them, many freelancers use them to file. With tax season beginning, now is a great chance to get up to speed with this ubiquitous form.
A person who is considered an employee of a company – whether salaried or paid by the hour – will receive a W-2 form which shows how much money has been withheld throughout the year for Federal, State, Social Security and Medicare taxes. This person is responsible for paying half of the payroll taxes due based on their taxable income, according to the IRS. The employer withholds and pays the other half. For 2012, the total amount due is 13.3 percent, as a result of Congress’s economic stimulus deal.
This is not the case with a 1099 form. The income reported on a 1099 (or 1099-MISC) has had no tax withheld by the party that issued it. The self-employed person is responsible for paying the full amount of payroll taxes on the amount listed as income. In other words, a 1099 means you’re liable for self-employment tax.
If you received a 1099 form, the IRS also received a 1099 with your income and tax information. Many people mistakenly believe if they did not receive a 1099, they don’t have to report the income they earned. This is a mistake that can cost dearly in penalties. If you receive untaxed income, it has to be reported. Businesses and corporations report if they paid miscellaneous income during the course of the year, and the IRS will match up this info to your tax payer id.
If you are issuing 1099-MISC, the individual must receive it by February 28th, 2013. If you fail to meet this deadline, the penalty varies from $30 to $100, depending on how long past the deadline you issue the statement. If you receive a 1099-MISC and don’t include the income on your tax return, the IRS can impose and accuracy-related penalty that is equal to 20 percent of your underpayment.