At SmartCapitalMind, we're committed to delivering accurate, trustworthy information. Our expert-authored content is rigorously fact-checked and sourced from credible authorities. Discover how we uphold the highest standards in providing you with reliable knowledge.
In the United States, corporations, small businesses and other employers use a variety of forms to record the income earned by employees and independent contractors. Typically, employees of a business in the U.S. receive a W-2 form that lists the income they received during the year. This form also contains deductions taken from that income in the form of federal and state taxes, deferred compensation and Social Security contributions, to name a few. A 1099 form is used for various reasons, but it typically is given to an independent contractor — also known as a freelancer — as a record of the income that he or she received from a particular business. Other versions of the 1099 can be used to report different types of income, such as interest, dividends, real estate sale proceeds and debt cancellation.
On a typical 1099 form, such as the 1099-MISC, the income earned will be noted, but there will not be any deductions for federal or state income taxes, nor will any deferred compensation, Social Security or medical deductions that can be noted. The 1099 form's recipient is not an employee of the business, so the business is obligated only to tender the income to the contractor without any deductions. This income is also reported to the Internal Revenue Service (IRS) so that it can track and tax the income earned by freelance workers. A freelancer is obligated to calculate his or her own taxes and forward those payments to the IRS.
People who receive 1099 forms come from a wide spectrum. Actors, artists, novelists, freelance writers and similar creative artists generally are compensated on a per-job basis and are not treated as employees. Many businesses have begun bringing in independent contractors to work on particular tasks. This helps keep the employer's costs down because the employer does not have to pay for such things as health insurance or life insurance and does not have to make contributions to retirement plans. After the task is completed, the employer can end the working relationship and simply issue the independent contractor a 1099 form.
Many other versions of a 1099 form also can be issued. A 1099-INT, for example, is used to denote the interest that the taxpayer earned. A 1099-G form denotes things such as tax refunds and credits received. A 1099-R is for distributions from retirement plans, annuities, pensions and the like. In all, there are more than 20 versions of the 1099 form.