Like HowStuffWorks on Facebook!

How Nonemployee Compensation Works

        Money | Taxes

Understanding Your 1099

If you've been designated as an independent contractor, you will receive a Form 1099-MISC sometime after the end of the year [source: IRS]. The form technically is designed to track what the feds call "miscellaneous income." For contractors, however, it's similar to a W-2 in that it shows how much you've made over the year, a figure that's then used to determine your tax responsibility.

Any business or organization that pays an independent contractor at least $600 over the course of a year is required to issue the worker a 1099-MISC. Lest you think the tax authorities might not notice a payment here or there, keep in mind that the business also has to issue a copy of the 1099 to the IRS. The IRS can use that info to make sure that you've reported all of your income at the end of the year. Failure to report can result in fines or -- in extreme cases -- jail time.

The 1099-MISC is designed to capture income from a variety of sources, which means that it includes a number of different boxes that may or may not be applicable to certain tax filers. Independent contractors like freelance workers are likely to find their pay is listed in Box 7, under "Nonemployee Compensation" [source: IRS]. Other boxes list income from sources like rent, royalties, professional fishing activities, sales of consumer goods and crop insurance proceeds. Yes, that money is likely to be taxed too.