Employers deduct income tax from their employees’ paychecks and remit and report it to the IRS. They give all their employees an IRS Form W-2, Wage and Tax Statement, showing wages and withholding for the year. Employees must file a copy of the W-2 with their income tax returns so that the IRS can compare the amount of income they report with the amounts their employers claim they were paid.
When you’re self employed, no income tax is withheld from your compensation and you don’t receive a W-2 form. However, this does not mean that the IRS doesn’t have at least some idea of how much money you’ve made. If the total of all the payments you receive from a client over the course of a year is $600 or more, the client must complete and file IRS Form 1099-MISC reporting the payments. The client must complete and file a copy of Form 1099 with:
- the IRS
- your state tax office if your state has income tax, and
To make sure you’re not underreporting your income, IRS computers check the amounts listed on your 1099 Forms against the amount of income you report on your tax return. If the amounts don’t match, you have a good chance of being flagged for an audit. You don't have to file the 1099 forms with your tax return. Just keep them in your records.
1099s with Errors
You should receive all your 1099 forms for the previous year by January 31st of the current year. Make sure the hiring firms you worked for have your current address, or the forms might not arrive on time (or at all). Check the amount of compensation your clients say they paid you in each Form 1099 against your own records to make sure they are consistent. If there is a mistake, call the client immediately and request a corrected Form 1099. The client may not have filed the 1099 with the IRS yet, because they are not due until February 28th (March 31st if filed electronically). If the 1099 has been filed with the IRS, ask the client to send the IRS a corrected 1099. You don't want the IRS to think you were paid more than you really owe. The 1099-MISC form has a special box that should be checked to show that the it is correcting a prior 1099 form.
No 1099 Sent
It is not unusual for clients to fail to file 1099 forms. This may be unintentional—for example, the client may not understand the rules or may just be negligent in filing them. On the other hand, some clients purposefully fail to file 1099 forms because they don’t want the IRS to know they’re hiring independent contractors.
If you do not receive a 1099 you’re expecting from a hiring firm that has your correct address, should you contact the firm and ask for it? This is not necessary. It's not your duty to see that 1099 forms are filed. This is your client’s responsibility. The IRS will not impose any fines or penalties on you if a client fails to file a 1099. It may, however, impose a fine on the client--and exact far more severe penalties if an IRS audit reveals that the client should have classified you as an employee.
Whether or not you receive a Form 1099, it is your duty to report all the self-employment income you earn each year to the IRS. If you’re audited by the IRS, it may examine your bank records to make sure you haven’t underreported your income. If you underreported, you will have to pay back taxes, fines, and penalties.