Tackling 1099 Taxes: How to File in 4 Steps
Filing taxes with 1099 income? It's hard to know where to start when it comes to 1099 taxes, but the process is less complicated than you think. Follow these five steps, and you’ll be well on your way to filing taxes with confidence.
1. Gather all your income information.
When you file your taxes, you’re reporting your income, deductions, and a few details about your tax situation to the IRS. That’s why the very first step to filing your taxes is gathering information about your income.
Here are some documents you’ll want to make sure you have with you:
Self-employed or independent workers will usually receive 1099 forms that report their income. Your first goal in the tax filing process is to find your 1099s. Your 1099s must be postmarked by the companies you work for by January 31, meaning you should have them in hand a few days into February.
1099-NEC
In most cases, you’ll receive a 1099-NEC and will use that information to file your taxes. If you earn at least $600 from a single source (one driving app, one client, etc.), that source must send you a 1099-NEC. If you earned less than $600 from any single source, you still have to report this income. You just may not receive a 1099-NEC.
1099-K
If you work for a third-party payment network (meaning your company processes payments on your behalf) then your income will likely be reported on a 1099-K. Typically, companies aren’t required to issue 1099-Ks unless you earn $20,000 or more by using their service and they have processed more than 200 transactions on your behalf in the previous tax year. However, many on-demand services will issue these forms no matter how much you made.
If you’ve made less than $20,000 from a particular company, you’ll want to gather any other income statements that you’ve been issued from that company throughout the year. If you didn’t keep copies, you can check your bank records to see when you’ve received income.
Didn’t receive a 1099?
You’ll still have to report your income. Even if you didn’t meet the income threshold to receive a 1099 ($600 for a 1099-NEC and $20,000 for a 1099-K), or you didn’t receive it in the mail as planned, you’ll still need to find proof of that income and report it on your taxes.
2. Collect all your deduction information.
As an independent worker, you almost certainly had expenses throughout the year that were directly related to your job (like mileage, parking fees, or home office supplies). If you paid for these business expenses, then you can deduct them from your business income to reduce the amount you pay taxes on. Put simply, this means you could decrease your taxable income and pay less in taxes.
When thinking about deductions, think about ordinary and necessary. Business expenses must be both ordinary (commonly accepted in your trade) and necessary (helpful and appropriate for your business). Common business deductions include:
Commissions and fees (such as the Uber booking and airport fees)
Advertising (business cards, online ads, printing costs for flyers)
Meals and entertainment (sharing a meal with a client)
Office expenses
Here are some possible forms of documentation for your deductions:
Expenses: Uber Tax Summary, mileage logs, receipts with notes on them, invoices (for inventory purchased), phone bills, subscription payment confirmations, bank statements
Asset Purchases: invoice for laptop, invoice for cell phone, a receipt for equipment
To claim your deductions, you need to have sufficient proof of each expense, as well as documentation on why (the “necessary” piece mentioned above) the expense was needed for your business. Your documentation will need to include:
Amount of the expense
Time and place of the expense
Business purpose of the expense
The name of the vendor for the expense
Any documentation on how you use an expense will help your case. This is especially true when you have costs that apply to both your business and your personal life. The IRS will want to see exactly how often an asset (like a car or a cell phone) is used for business and how often it’s used for personal reasons. That’s why keeping a mileage log and saving your cell phone records is always a good idea.
If you’ve kept receipts for your business expenses, good work! You won’t need to send in your documentation with your tax return, but be sure to hold on to all of them for at least three years so that in the off chance of an audit, you’ll have them for proof.
Why three years? Often, it takes the IRS that long to uncover returns that require auditing, which is why it’s best not to throw away your receipts for at least three years.
If you haven’t kept receipts, don’t worry, you can still deduct business expenses. You just have some extra work to do. You’ll want to make sure you can find proof of each business expense you deduct.
If you haven’t been tracking mileage either, don’t panic. You may be able to figure it out still, and you should start tracking your mileage right away to make the next tax season simpler.
3. Choose a filing method.
There are many tax filing options available to you, including online software, tax preparers, nonprofits that will file for you free of charge, and filling out forms by hand the old-fashioned way.
So, which filing method is right for you?
Filling out forms by hand: This method can take a lot of your time, but it’s free. If you have only one 1099 and few business expenses, or you have a lot of experience preparing your taxes as an independent worker, this could be the right option for you.
Tax preparers and CPAs: If you have a complicated tax return and are willing to spend a little extra for a tax preparer or CPA, then you could hire a tax preparer. There are also a number of big-box tax preparation companies that are a bit more cost-effective than hiring an accountant.
Low-income options: Some free tax preparation nonprofits will help you at no charge, depending on your income. You can read more about some of these free programs.
Software: Tax-filing software ranges in price and it is best to shop around. If you don’t have that complicated of a tax return (fewer sources of income and already have everything you need prepared), then software is a great option.
4. File.
Now that you’ve gathered all the necessary information, you’re ready to file. If you’re using a tax preparer, you’ll just need to bring your documentation with you, and they’ll prepare most of your return.
If you’re using filing software or are filing by hand, you’ll need to set aside about an hour to prepare your entire tax return.
Worried you’ll run into trouble when you’re filing your taxes? Try not to stress. You have a ton of resources available to you when it comes to filing with self-employment income.
Most tax filing software has great blogs and help centers that have answers to common questions about filing taxes.
Disclaimer: The information contained in this guide is not offered as legal or tax advice. The U.S. federal income tax discussion included in this guide is for general information purposes only and is not a complete analysis or discussion of all potential tax consequences that may be relevant to a particular individual. In light of the foregoing, each individual should consult with and seek advice from such individual’s own tax advisor with respect to the tax consequences discussed herein. Any information contained in this guide is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the U.S. Internal Revenue Code of 1986, as amended.
