Taxes are probably not your favorite topic. But it’s important to understand the basics because taxes take a big bite out of our income.
One tax document that you may receive at the beginning of the year is a 1099 form. In this post, I’ll explain what they are, who gets and issues them, what to do with a 1099 to make sure you comply with the tax law and stay out of trouble. Plus, I’ll cover 8 things you should know about taxable income.
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What Income Is Taxable?
When it comes to paying taxes, the burden of complying with the law falls on your shoulders. Forgetting to file or claiming ignorance about what you owe isn’t an excuse. Failing to pay can end up costing you a boatload of back taxes, interest, and penalties if you get audited.
You must report all income from any source within the U.S. or abroad, unless it’s legally exempt from taxation. Be aware that income has a broader definition than just receiving money. Income can also be in the form of property, services, or a situation where no money changes hands, such as a barter.
Even if you have an informal side job as a freelancer or independent contractor that creates income, it’s taxable, no matter if you earn $1 or $1 million. That includes providing services like babysitting, dog walking, computer repair, and housecleaning, even when you also have a full-time job.
Even if you have an informal side job as a freelancer or independent contractor that creates income, it’s taxable, no matter if you earn $1 or $1 million.
However, if your total income is below a certain threshold, you’re not required to file a tax return. The requirements for having to file taxes depends on three factors: your gross income, your filing status (such as single or married), and your age.
For instance, if you’re single, under age 65, and had total gross income less than $10,350 in 2016, you don’t have to file a tax return. If you’re married, file a joint tax return, and both spouses are under age 65, you don’t have to file a return if your household gross income was less than $20,700.
These filing thresholds can change, so check out IRS Publication 17, Your Federal Income Tax for Individuals and the Do I Need to File a Tax Return? Tool for more information.
Side note: Even if your income is below the filing requirement threshold, it’s still smart to file. Let’s say you had too much tax withheld from your paycheck or are entitled to a tax credit. The government doesn’t automatically pay you a refund—the only way to get your money is by filing a tax return.
To learn more about the types of income that are taxable and nontaxable, refer to IRS Publication 525.
See also: How to Make Money (Legitimately) from Home
What Is a 1099 Tax Form?
The most common type of taxable income that you’re probably already very familiar with is from an employer. Wages and taxes withheld from your paycheck are reported to you and the Internal Revenue Service (IRS) each year on a form called the W-2.
But as I mentioned, there are other types of income you may receive in addition to a regular job that are also taxable. These include, but aren’t limited to:
freelance or side-business income
interest income on a savings account or certificate of deposit (CD)
dividends from investments
proceeds from real estate transactions
rent or royalty income
prize or contest winnings
withdrawals from retirement accounts
cancellation of debts
(See IRS.gov for a full list of taxable income.)
To keep track of what you earn outside of W-2 income, the IRS created a variety of forms called 1099s. The people or companies who pay you are required to file a 1099 to describe and document what you were paid during the year. For instance, freelancers typically receive a 1099-MISC and the 1099-INT reports interest income.
The people or companies who pay you are required to file a 1099 to describe and document what you were paid during the year.
Payers are not required to withhold taxes for non-employees. So, if you received 1099 income and are self-employed, you’ll have to pay self-employment taxes (Social Security and Medicare taxes) based on your federal tax return and the net income from your business.
See also: 5 Retirement Options When You're Self-Employed
What to Do With a 1099 Tax Form (or One That’s Missing)
If you receive a 1099 form in the mail, don’t throw it away because you’ll need it to file your tax return. People or companies who pay you more than a minimum amount are supposed to send you a 1099 copy by January 31. For the 1099-MISC, the minimum is $600, but it varies depending on your income type and the 1099.
However, it’s possible that your 1099 copy can get lost in the mail or that you get forgotten by a payer. If you receive non-employment income, but don’t get a corresponding 1099, you’re not off the hook for reporting it to the IRS—even if you were paid less than $600.
It’s a common misconception that if you don’t receive a 1099 or if you earn less than $600 from a payer, that the income isn’t taxable. That’s dead wrong—there’s no minimum amount you can exclude from gross income, even if no one person or company paid you less than $600. However, as I mentioned, if your total gross income is very low, you may not be required to file taxes.
At the end of the day, you must keep good records because you’re responsible for paying taxes based on what you were paid. If you underpay, the IRS will probably find out and reach out for their share plus penalties.
It’s likely that the IRS has a copy of your 1099 even if you don’t. So, remember that it’s still your responsibility to pay tax on all income you receive that is taxable. If you don’t receive a 1099, or you get one that you believe has an error, be sure to follow up with the payer.
If you use a free tax program like Turbo Tax or Credit Karma, it asks if you have any 1099 income. Verify that the information on your 1099 is correct and then include the information. Or give your 1099 forms to your tax preparer along with all your other documents for the tax year.
At the end of the day, you must keep good records because you’re responsible for paying taxes based on what you were paid. If you underpay, the IRS will probably find out and reach out for their share plus penalties.
See also: How to Find the Best Financial Advisor or Expert
8 Things to Know About Taxable Income
Here are 8 key points that cover the basics about taxable income so you're not blind-sided by an unexpected tax bill or failure to comply notice from the IRS:
1. Some types of income are not taxable. These include child support payments, gifts, inheritances, life insurance proceeds after someone's death, and income from a qualified education scholarship used for tuition and books.
2. When you pay more than $600 to someone who isn’t your employee—such as a house cleaner or pet sitter—or a corporation, you must issue him or her a 1099-MISC form.
3. Withdrawals from a traditional retirement account are taxed as ordinary income because contributions are made on a pre-tax basis. Roth accounts work in the opposite because you pay tax upfront, but withdraw contributions and earnings completely tax free.
4. If you get a late 1099 after you filed taxes don’t sweat it. Just file an amended return as quickly as possible to make a correction. As I previously mentioned, you're responsible to report all taxable income even if you don't receive a corresponding W-2 or 1099 form.
5. Remember to change your address with all payers, your employer, the postal service, and the IRS so you never miss an important tax document in the mail.
6. Canceled or forgiven debt is considered taxable income. If you settle an old debt for less than you owe, remember that you typically must pay tax on the portion that was forgiven or discharged.
7. Your income forms are matched by the IRS. Every 1099 and W-2 the IRS receives from payers is matched with payees’ 1040 tax return by Social Security number. So be sure to include an explanation if you disagree with the amount on the form or couldn’t get an error corrected.
8. State income taxes matter too. If your state has an income tax, they received the same information that the feds do. So be sure your state return will match up with your income records.
See also: Self-Employed? When and Why to Incorporate Your Small Business
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