Filing your taxes is a basic responsibility as a working adult. At the end of every tax year, you have to file a final tax return that settles your tax responsibility for the preceding year. By calculating the total amount of taxes you paid and the amount of money you earned, you can determine if you still owe taxes or if the government perhaps owes you a refund for overpayment.
Those who are self-employed or independent contractors will have a different process when filing their income taxes. They will have to file a 1099 instead of a 1040. What are some of the big differences between these two kinds of forms?
There are multiple different kinds of form 1099
Although there are streamlines and more expensive versions of form 1040, almost all employed taxpayers fill out roughly the same paperwork. They will also receive the same forms from their employers. That is not true for independent contractors or those who are self-employed.
There are multiple different 1099 reporting forms that apply in different situations. Certain kinds of 1099s can apply to taxable interest, capital gains, dividends, rental income and royalties. If a company or individual that you provided freelance or contract work for paid you more than $600, they will have to provide you with the 1099-NEC. You will have to input information from all of the 1099s that you receive into your final tax return.
After the first year, a 1099 filing requires estimated payments
When you are an employee, you fill out a W-2 and then file a 1040 to report your income to the IRS and settle any discrepancies. When you are a contractor, you will have to take all of the information from the 1099s that you receive and put them together on a 1099 return.
After that first year, you will then have to submit quarterly estimated payments both to the state and to the federal government. While self-employment and freelance income varies greatly from year to year, you will need to at least meet the tax requirements from the previous year through your quarterly payments or face the risk of a penalty due to underpayment.
Independent contractors dealing with tax issues often need professional support to learn about and meet the unique obligations they have.