Filing Cash Income Without a 1099 Form
Working as a freelancer or independent contractor can be challenging. You have to juggle client needs and provide a great product or service. Contractors must also carefully review their business records, in order to file an accurate tax return.
This article explains the difference between independent contractors and employees, and reviews the 1099 form. You’ll learn why some contractors do not receive a tax form from every client, and how to file taxes without 1099 forms.
When a business processes payroll, independent contractors and employees are handled differently.
Independent Contractors vs. Employees
The IRS distinguishes independent contractors from employees using three criteria:
- Behavioral control: Does the company have a right to control what the worker does and how they perform the job?
- Financial control: Does the company have a say in the material aspects of a worker’s job? In other words, does the business decide which expenses are reimbursed, or who provides the necessary tools and supplies?
- Contractual Relationship: Is there a written contract? Are benefits, such as pension, insurance, and vacation days, part of the contractual obligation?
FICA taxes are paid by workers and employers to fund Medicare and Social Security. When the three criteria above are met, the IRS considers the worker to be an employee of the company, and the firm is responsible for filling out a W-4 and paying a share of the FICA taxes.
If any of these criteria are not met, the worker is an independent contractor who is responsible for paying his or her own taxes, including income tax and FICA tax. Most of these individuals receive a 1099-NEC.
What is a 1099 Form?
Companies use Form 1099-NEC to report income earned by people who work as independent contractors rather than regular payroll employees.
Here is the form:
The IRS requires businesses to mail a 1099 form directly to the independent contractor, so that the IRS can predict how much tax revenue to expect from self-employed individuals. Independent contractors must receive each 1099 form by February 1st of the year after they provided services
The 1099-NEC serves as an informational reminder of how much a contractor earned from each company in a particular year. However, not every contractor receives a 1099.
Does Every Independent Contractor Receive a 1099 Form?
If a business pays a contractor less than $600, the company is not required to provide a 1099-NEC form. Keep in mind that contractors must pay taxes on all earnings, regardless of the dollar amount paid by a client.
Filing Taxes Without a 1099 Form
Here are the steps to file a tax return, when you don’t receive a 1099 from all of your customers:
Gather all of the forms that you received from customers during the year.
Review your deposits, and compare your 1099 documents with the customer deposits. If you received a client payment and not a 1099, the dollar amount must still be posted to your tax return.
Contractors post business revenue and expenses to Schedule C of the personal tax return (Form 1040). Revenue less expenses equals net income (or profit), and the contractor’s net income is added to other source of income on Form 1040.
Here is Schedule C, Part 1:
All of the contractor’s income must be posted to Part 1, line 1 of Schedule C (Gross receipts and sales). This includes income reported on 1099 forms, and payments under $600 that did not require a 1099 form.
The contractor’s business net income is posted to Schedule 1 of Form 1040, and the amount is added to other income (spouse’s income, dividend income, interest income) on the personal tax return.
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