North Carolina Building Contractor License Practice Exam

What does a 1099 form specifically report?

1. Employee wages

2. Contractor payments

3. Tax deductions

4. Business expenses

The correct answer is: Contractor payments

The 1099 form specifically reports contractor payments, which is crucial for both businesses and independent contractors for tax purposes. When a company hires an independent contractor to perform services, it is required to report the amount it paid to the contractor during the tax year using this form. This report helps the Internal Revenue Service (IRS) track income that may not be reported on a traditional W-2 form, which is used for employees' wages. In essence, the 1099 form ensures that all income, including what independent contractors earn, is accounted for in the tax system. This also clarifies the distinction between employees and contractors, as employees receive a W-2 that details their wages and withholdings, while contractors receive a 1099 to declare their earnings that might not have had taxes withheld. Understanding this distinction is crucial for compliance with tax regulations and for managing financial records accurately.