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What are income statements like the 1099 form and what are they used for?
The Basics of the Income Statements
Federal tax preparation involves various types of IRS forms that taxpayers and tax exempt institutions use to report financial information to the IRS and how these forms are used to calculate taxes to be paid to the federal government and the state governments.
Third parties such as employers, banks, and other financial institutions are required to prepare Informational Returns on a calendar year basis (i.e. January 1 through December 31) they report both to the IRS and to the taxpayers. The taxpayers use the Informational Returns to correctly complete their own tax returns. Form 1099 is one of type of forms:
Form 1099-MISC:is used to report all other types of income other than salaries, wages, and tips (for which the Form W-2 is used instead). Such income include non-employee compensation, rent, royalties, etc.
In addition, other income and interest statements include the following:
Form 1098:is the Mortgage Interest Statement used to report interest that a taxpayer has paid on his or her mortgage (such interest might be tax deductible as an itemized deduction).
Form 1098-C:is the form used to report charitable contributions of motor vehicles, boats and airplanes.
Form 1098-E:the Student Loan Interest Statement, used to report interests the taxpayer paid on student loans that might qualify as an adjustment to income.
Form 1098-T:the Tuition Statement, that reports payments received or amounts billed for qualified tuition and related expenses that might entitle taxpayers for an adjustment to income or a tax credit.
Form W-2:the Wage and Tax Statement used by employers to report salaries, wages or other compensation paid to employees and the taxes withheld from them. Employees are provided with W-2s by employers on or before January 31.
Form W-2G:is used to report gambling winnings to the IRS (tax return obligation for winnings over $600.00 per game of chance).
There is also the IRS Withholding Calculator tool that comes in handy in helping to analyze financial needs of the taxpayers. Calculating income is important in the sense that the Withholding Calculator can help an employee taxpayer determine whether to give an employer some type of a withholding allowance certificate (i.e. a Form W-4), in order to avoid having to pay too much or too little Federal income tax withheld from the taxpayer's pay. Then, taxpayers can use information generated by the withholding calculator to help fill out the form. Employees who benefit from the withholding calculator include the following:
- Taxpayers who would like to modify their withholding to reduce their tax refund or balance due;
- those whose financial situations are only estimated by the worksheets on the paper W-4; and
- those with non-wage income in excess of their adjustments and deductions.
Taken as a whole, the income statement provides a solid foundation about financial information of an individual taxpayer or a business entity. The income statement is actually good to see how any changes are accounted for and it can be used to even create (or double check) an individual's or company’s statement of cash flows.
For information on how to read the various income tax and informational returns forms and how they can be used to maximize your tax return in your favor, please visit a Liberty Tax Service office near you.