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At What Point Do I Need a 1099?, or How I Learned to Avoid an Audit

abacus.jpgBoy, did the husband and I get screwed this year when tax season came along. Why? Because a CPA is only as good the information his or her clients provide, and knowing what you need is the first step. The documentation I get from the company or companies we work for might be only a small part of the picture.
That’s why I thought I’d ask Adi Rubin, an L.A.-based CPA and friend, a few questions so that next tax season doesn’t cause us a dry season.
Q: My husband is a staff writer with a not-so-ambitious freelancing side career. He earned $4,000 for one article last year, and $500 for another, both for different magazines. How do we account for this money? At what point do I need a 1099?
A: A 1099 is required when an individual or non-corporate entity earns $600 or more in a calendar year from an organization. If a writer works for multiple companies as an independent contractor and earns less than $600 from each of these companies he/she may not receive any 1099s.
Q: Do I really have to claim my earnings if I earn UNDER this amount?
A: Do you really? Yes. Taxpayers are required to report all income from all sources. Reporting requirements on the part of the person paying you don’t change the taxpayer’s responsibility to report their income. It’s a bit of an honor system when it comes to income that falls below the threshhold for the reporting of 1099s.

Q: How do I claim this money if I don’t get a 1099?
A: Taxpayers are taxed on all income earned regardless of whether or not the income is reported on a 1099. Self-employed individuals report their income on Schedule C, which is attached to your Form 1040, Individual Income Tax Return. The gross income reported on your Schedule C should include all income received. It is the individual’s responsibility to report their actual gross income – whether or not they have received 1099s to support it.
Q: So, if we didn’t get a 1099 on the piece that earned us $4,000, do we have to claim it? Or does the government never need to know about?
A: There could be many reasons you didn’t receive a 1099 for the $4,000:

  • Did you move? The payor’s responsibility is to send the 1099 to your last known address. If it doesn’t get to you, they’ve still fulfilled their obligation. But now the IRS has a 1099 showing that you earned income – if you don’t report it, they’ll catch it.
  • Perhaps the payor didn’t bother issuing you a 1099. Allow me to use a real client story in order to explain the pitfalls of not reporting income in this case. A client of mine was audited by the IRS. She is a musician and had hired several backup singers and musicians for a performance. She claimed a deduction for the cost of hiring these individuals. When the auditor looked at the tax return, she asked to see the 1099s that were issued to these backup musicians. My client hadn’t prepared 1099s for them, though, so the auditor asked to see the backup musicians’ tax returns. The backup musicians hadn’t reported the income and, years later, had to amend their tax returns. Not only did they need to pay the tax owed on the income earned, but they were also liable for penalties and interest which had accrued since the original filing date of their tax return.
    Not having a 1099 to show the income you earned makes it more difficult for the IRS to track it down, but there are many ways that they can uncover it. It will save a lot of future headaches if you report all your income properly from the very beginning.
    Taffy Brodesser-Akner, Director of Community Development

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