1040 vs. 1099 forms: What are the differences?

There are few guarantees in business—except filing taxes. But filling out the appropriate tax forms isn’t always so cut and dry, especially when you manage a distributed team of independent contractors and regular employees.

The difference between the 1040 and 1099 forms is based on their purpose—one is filed by individuals for their personal income tax, whereas the other is often filed by businesses to report payments to contractors and freelancers. Employers and taxpayers in the United States must carefully understand the IRS rules and legal implications of each tax form. 

This guide will provide straightforward definitions and a detailed comparison of 1040 versus 1099 tax forms. With a strong understanding of these tax forms, you can navigate the complexities of filing taxes and ensure that your workers have all the necessary information when tax season arrives.

Form 1099 explained

Form 1099 is a group of tax forms that report payments to non-employees, including freelancers, independent contractors, and sole proprietors. The business that contracts the service fills out the IRS form at the end of the tax year with the worker’s total earned income. They are then responsible for sending the 1099 to contract workers and the IRS in preparation for tax season. 

The IRS requires a 1099 for any non-employee who is paid $600 or more during the tax year. Independent contractors aren’t reported in traditional payroll systems, so Form 1099 ensures accurate tax reporting and helps the IRS track the income of self-employed workers.

Form 1099 has several variations for different types of income reporting, including real estate, interest and dividends, and taxable income for non-employees. For a deeper understanding of Form 1099, check out Oyster’s 1099 breakdown. 

What is Form 1040?

A 1040 tax form is the standard tax return form an individual uses to report their taxable income and calculate their federal tax burden to the IRS. It’s an essential tax document for reporting one’s salary and wages, claiming deductions and tax credits, and determining individual income tax. 

Employees and independent contractors complete and submit an IRS Form 1040 during tax season. It must include income from traditional employment and freelance gigs—provided in their W-2 and 1099s. Form 1040 determines how much a worker owes in federal income tax and the potential tax refund for W-2 employees, based on the income reported and any deductions or credits.

Here’s a breakdown of the most important sections on Form 1040:

• Contact information: This section includes up-to-date contact details, as well as the taxpayer’s marital status and whether they’re filing their income tax return jointly or separately.
• Additional income: A taxpayer’s individual income tax is based on salary or wages and other types of income, including investments and dividends. This section also includes information about tax refunds, credits, and offsets. 
• Adjusted gross income (AGI): This is a taxpayer’s total income minus deductions and exemptions (e.g., a health savings account, IRA contributions, and self-employment expenses). AGI is the number the IRS considers taxable income. 
• Tax liability: Once a taxpayer’s AGI is calculated, they apply the appropriate tax rate. This is also an opportunity to add additional deductions, including the earned income credit (formerly claimed with Form W-5), charitable contributions, and local and state taxes. 
• Taxes owed or refunds due: Freelancers and independent contractors must cover all payroll taxes and will owe money when they file taxes at the end of the year. W-2 employees’ payroll taxes are automatically deducted from their paychecks. They may get a tax refund either by direct deposit or check. 

1040 vs. 1099: Key differences

There are countless tax forms to keep track of. It’s no wonder so many confuse the most common forms. Let’s review the primary differences between 1040 and 1099.

1. What are they used for? 

Individual taxpayers use Form 1040 to file their annual federal income tax return. This tax form captures an extensive overview of their income, deductions, tax credits, and overall tax liability. It consolidates all income types (e.g., salary or wages, interest, and dividends) to determine the final income tax owed.

In contrast, Form 1099 is filled out by employers to report payments made to non-employees (aka freelancers or independent contractors). It documents non-employee compensation rather than reporting taxes owed. Since a copy is sent to the IRS, it serves as an important record of payments to ensure contractors accurately report income on their tax returns. 

2. What information is collected?

Form 1040 provides the IRS with details about an individual taxpayer’s overall financial situation, including their total income, approved deductions, and tax credits. The IRS uses this information to determine the total tax liability or tax refund.

A Form 1099 reports specific payments made to non-employees. It doesn’t include personal deductions or credits. 

3. Who files the forms? 

Individual taxpayers fill out Form 1040 to report their income and calculate their federal tax burden. Businesses file 1099s to report non-employee compensation during the tax year.

4. When are they due? 

Businesses must send 1099s to independent contractors by January 31 of the following year. For example, 1099 forms must be sent to workers by January 31, 2024, for income paid in 2023. Organizations have until March 31 to electronically submit 1099s to the IRS. If they’re sent by mail, they must be accompanied by a Form 1096.

Individual taxpayers have until April 15 to file their taxes with Form 1040. 

5. Different types of 1099s

Although there is just one Form 1040, there are more than 20 types of 1099s. Understanding the distinctions between a 1099-NEC and a 1099-MISC can feel overwhelming, so here’s a breakdown of the most common 1099s employers and taxpayers may handle during tax season:

• 1099-NEC: The most common 1099. It reports all non-employee compensation issued to freelancers and independent contractors.
• 1099-INT: Reports interest income earned on financial services, such as savings accounts and government bonds
• 1099-MISC: Reports miscellaneous income, including rent, royalties, prizes, and other payments not covered by Form 1099-NEC
• 1099-DIV: Reports distributions and dividends from investments
• 1099-S: Reports profits from the sale of property or land

Optimize tax compliance and form completion with Oyster

Let Oyster worry about international tax compliance so you can focus on building your global workforce. Forget about wrestling with complex tax forms—Oyster’s global compliance simplifies everything related to local tax regulations. Our automated software and local experts handle all the paperwork, streamlining hiring, payroll, and tax compliance for global teams. Learn more about how Oyster can transform your business.

About Oyster

Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.