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Getting and giving 1099-MISC income forms
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.
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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 1099s.

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 for trouble.

 

Bankrate.com's corrections policy
-- Posted: Jan. 21, 2004
 
 
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