In addition to the millions of individual and business tax returns the Internal Revenue Service (IRS) receives every year, it also receives information returns. These are documents from employers and institutions that provide information about the income of individual taxpayers, which help the IRS determine their tax obligations. Form 1099 is one such form.
A 1099 tax form is used by employers, lenders and others to report income to an individual that is not a part of the wages, salaries and tips reported on a W-2. The form is similar in appearance to a W-2, but is specifically tailored to report the essential information of a particular type of income. The form is received by the individual whose income is reported, and the information provided in the form is used to complete his individual tax return.
There are more than a dozen variations of Form 1099, each of which relates to a different form of income. One of the more common forms is 1099-DIV, which is issued by a broker to document an individual's capital gains and dividends during the tax period. 1099-MISC covers all miscellaneous income, such as contract work, paid by a business and received by a non-employee. If someone has debt forgiven other than in bankruptcy, the amount of the discharged debt becomes reportable income, documented on Form 1099-C.
The people who receive 1099s generally fall into two groups: those who work on a contract basis or are self-employed and those who have investment income. The first group includes professions such as artists, actors and writers, whose payments are reported on a 1099-MISC. The members of the second group, the investor class, receive 1099-DIVs and 1099-INTs (for interest income), but they are also likely to have more complex transactions. A distribution from an IRA, for example, is reported on a 1099-R.
Form 1099 is important because the income being reported there typically hasn't had payroll taxes withheld. This means that the taxpayer likely has an obligation to pay Social Security and Medicare taxes on their total income. Additional taxes could also apply if the income is the result of self-employment. Capital gains and qualified dividends are also taxed at different rates than regular income.
The entity responsible for generating a 1099 must provide one copy to the taxpayer and one to the IRS. Because taxpayers need this information to complete their individual returns, the IRS requires that most 1099s be filed by January 31, the same deadline employers have for sending out W-2 forms.