The self-employed version of the W-2 form is the
1099. Any individual or company that pays you $600 or more in the
previous year is required by law to report that payment, known in
the tax world as miscellaneous income, via a 1099-MISC form. The form
is to be sent to you and the Internal Revenue Service by Jan. 31.
|Getting and giving 1099-MISC income
Here's some wisdom from Portland,
Ore.-based enrolled agent and tax preparation service owner Joseph
Anthony for those gathering these documents for use in completing
their returns. He also has some advice for those who must send out
When you get a 1099, remember that the government
gets a copy, too, so you can't ignore it. Look it over as soon as
it arrives, and compare it to your own payment records. If there
is a discrepancy -- and plenty of people discover them -- figure
out why. Don't assume the government won't notice.
"The IRS computer system is still pretty inadequate,
but the program that matches 1099s and other third-party documents
is much better than it was five years ago," Anthony warns.
What if it's wrong?
Sometimes the 1099 is just plain wrong. Anthony points to a client,
a consultant, who received a 1099 that had an extra zero: The company
claimed to have paid the consultant $64,000 instead of $6,400. The
man ignored the error and about a year later, he received a bill
from the IRS for $30,000 in tax, penalties and interest. Anthony
got the issuer of the 1099 to admit its error, sent that documentation
to the IRS and the bill went away.
But fixing problems like this right away lets you
avoid the aggravation down the road. Contact the client's accounting
department, and get them to send out a corrected 1099. Keep records
of the correspondence in case the IRS doesn't get the correction.
What if it's not quite right?
Sometimes the 1099 issuer includes payment for items that you don't
consider income, such as reimbursement for expenses. Let's say you're
an interior decorator, were paid $1,000 for designing a room and
reimbursed $2,000 for framed photographs you bought to complete
the look. The 1099 arrives saying you were paid $3,000.
Anthony says report the $3,000 in income and take
all the deductions to which you are entitled. This includes the
cost of the framed pictures for which you were reimbursed, as well
as other costs of doing the assignment. Once you subtract these
direct expenses from your income, it will all even out.
What about end-of-the-year income?
When a client sends the 1099 at the end of the year, it reflects
payments right up to Dec. 31, but you probably didn't actually receive
the paycheck until the following January. You can legally handle
the discrepancy two ways, Anthony says. You can report the income
for the year on the check and then subtract it out as an expense
adjustment on Part 5 of Schedule C, where adjustments for income
the following tax year are taken into account. But be sure to actually
report the income next year, Anthony warns, otherwise, you're begging