Taxes my not be your favorite financial topic but it's important to understand the basics. Laura explains (in plain English) what a 1099 tax form is, who issues and receives them, rules to comply with the law, and 8 key things you should know about taxable income.
Taxes are probably not your favorite topic. But it’s important to understand the basics because taxes take a big bite out of our income.
One tax document that you may receive at the beginning of the year is a 1099 form. In this post, I’ll explain what they are, who gets and issues them, what to do with a 1099 to make sure you comply with the tax law and stay out of trouble. Plus, I’ll cover 8 things you should know about taxable income.
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What Income Is Taxable?
When it comes to paying taxes, the burden of complying with the law falls on your shoulders. Forgetting to file or claiming ignorance about what you owe isn’t an excuse. Failing to pay can end up costing you a boatload of back taxes, interest, and penalties if you get audited.
You must report all income from any source within the U.S. or abroad, unless it’s legally exempt from taxation. Be aware that income has a broader definition than just receiving money. Income can also be in the form of property, services, or a situation where no money changes hands, such as a barter.
Even if you have an informal side job as a freelancer or independent contractor that creates income, it’s taxable, no matter if you earn $1 or $1 million. That includes providing services like babysitting, dog walking, computer repair, and housecleaning, even when you also have a full-time job.
Even if you have an informal side job as a freelancer or independent contractor that creates income, it’s taxable, no matter if you earn $1 or $1 million.
However, if your total income is below a certain threshold, you’re not required to file a tax return. The requirements for having to file taxes depends on three factors: your gross income, your filing status (such as single or married), and your age.
For instance, if you’re single, under age 65, and had total gross income less than $10,350 in 2016, you don’t have to file a tax return. If you’re married, file a joint tax return, and both spouses are under age 65, you don’t have to file a return if your household gross income was less than $20,700.
These filing thresholds can change, so check out IRS Publication 17, Your Federal Income Tax for Individuals and the Do I Need to File a Tax Return? Tool for more information.
Side note: Even if your income is below the filing requirement threshold, it’s still smart to file. Let’s say you had too much tax withheld from your paycheck or are entitled to a tax credit. The government doesn’t automatically pay you a refund—the only way to get your money is by filing a tax return.
To learn more about the types of income that are taxable and nontaxable, refer to IRS Publication 525.