Tax payers receive a 1099 form to report income earned from a source other than their full-time employer. These forms document earnings above $600 from certain types of financial transactions, such as earning interest from a bank account or getting paid as an independent contractor. If you are a self-employed contractor or consultant, you should receive a 1099 form from each source that paid you $600 or more for your services. Another source of reportable income is if you had a credit card company accept a debt-cancelation or pay-off. The money you don’t have to pay is viewed as taxable income, and should result in a 1099-C from your creditor.
What is a 1099 Form
A 1099 form is simply a sequence of documents that the Internal Revenue Service (IRS) uses for various types of income you earn throughout the year. For each 1099 form that you receive, the client, financial institution or other agency that sends it to you also sends a copy to the Internal Revenue Service. You need to report each 1099 form you receive on your income tax return.
Planning to Pay
If you know you’ve received income from a supplemental source, you should plan to pay taxes on this income by April 15. You can do this by keeping good records of the income you’ve received and of your business related expenses. By ensuring your finances are organized come tax time, you’ll save yourself the trouble of rushing to meet the deadline, and of possibly missing out on some valuable tax deductions.
You can budget for paying taxes in the spring by saving year-round. This can be done by taking a fraction of your earnings, say 10-20 percent, and depositing it into a separate savings account. This way, come tax-time, you’re prepared to pay the bill.
Consequences of Skipping Out
It’s a common misconception that if you’re an independent contractor or a freelancer that you’re getting paid ‘under the table’. The truth is, if you’re an independent contractor, you will receive a 1099 form for every organization that pays you $600 or more. Creditors have the option of issuing a 1099-C after forgiving a consumer his or her debt. In the eyes of the IRS, the amount of debt forgiven is treated as taxable income, since not having to pay the debt is the equivalent to more money in the consumer’s pocket.
If you don’t file and pay taxes on this income, the IRS can come after you. Not only will you be charged penalties for failing to file on time, you will also be charged additional fees for not paying your taxes. If you ignore notices from the IRS to pay, the taxes you owe can then be reported as an unpaid tax lien, which stays on your credit report for up to ten years from the filing date.
Paying your taxes after earning additional income doesn’t have to catch you by surprise. With a little planning and budgeting, you can be prepared to pay the bill. However, if you’re having trouble getting your finances ready before tax-time, consider consulting with a tax-preparer who can help you get up to speed.
About the Author
Cyndi Perkins is an award-winning newspaper editor, columnist and reporter. Beginning her career in the 1980s, she has covered business, gardening, health, fitness, travel and parenting for international, national and regional publications.
This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Published by permission from ConsumerInfo.com, Inc., an Experian company. © 2014 ConsumerInfo.com, Inc. All rights reserved.