In the US, employees receive a W-2 form listing their income and deductions, while independent contractors receive a 1099 form without deductions. There are over 20 versions of the 1099 form for reporting different types of income.
In the United States, corporations, small businesses, and other employers use a variety of forms to record income earned by employees and independent contractors. Typically, employees of a company in the United States 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. The 1099 form is used for a number of reasons, but it is typically given to an independent contractor, also known as a freelancer, as a record of the income you received from a particular business. Other versions of the 1099 can be used to report different types of income, such as interest, dividends, income from real estate sales, and debt cancellation.
On a typical 1099 form, such as the 1099-MISC, earned income will be listed, but there will be no federal or state income tax deductions, nor will there be any deductions for deferred compensation, Social Security, or medical deductions. The recipient of the 1099 form is not an employee of the business, so the business is required only to report the income to the contractor without deductions. This income is also reported to the Internal Revenue Service (IRS) so that it can track and tax the income earned by the self-employed. A freelancer is required to calculate their own taxes and submit those payments to the IRS.
People who receive 1099 forms come from a wide spectrum. Actors, artists, novelists, freelance writers, and similar creative artists are generally compensated for work and are not treated as employees. Many companies have started hiring independent contractors to work on particular tasks. This helps keep employer costs down because the employer doesn’t have to pay for things like health insurance or life insurance and doesn’t have to make contributions to retirement plans. Once the task is complete, the employer can end the employment relationship and simply issue the independent contractor a 1099 form.
Many other versions of a 1099 form can also be issued. A 1099-INT, for example, is used to denote interest earned by the taxpayer. A 1099-G form denotes things like 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.
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