1099 Income & Unemployment

Self-employed workers include independent contractors, contract workers, freelancers, and gig workers. These workers should receive a Form 1099 for the income they earn. While self-employed individuals generally have more freedom to do their job than full-time employees, there are some downsides to self-employment. One is that self-employed workers traditionally don’t qualify for unemployment benefits. Still, anyone who files for unemployment benefits needs to report their earnings, including any earnings on a 1099.

What Is Tax Form 1099 & What Is It Used For? 

A Form 1099 is used to report income you receive during the year from sources other than a full-time employer. The definition of “employer” can get complicated, but it’s characterized by the business controlling or having the right to control what the worker does and how they do it. Employees also typically have access to health insurance and retirement benefits through their employer. If you’re in an employer/employee relationship, you’ll receive a Form W-2 (employee wage and tax statement). If you’re not, you’ll receive a Form 1099.  

Form 1099-NEC is used to report non-employee compensation (NEC). Self-employed workers include independent contractors, contract workers, freelancers, and gig workers. These are sub-categories of Form 1099 workers. You may fit into more than one category at a time. 1099s generally cover any worker paid by a trade or business who is not an employee.  

If a business pays you money during the year, they are required to prepare a Form 1099-NEC and send it to you, with a copy to the IRS, by January 31 of the following year. That way, you’ll have it when you file your tax return. You’ll have to pay income tax on the earnings. The IRS will likely use their copy to make sure you do.  

Only payments exceeding $600 for the calendar year and made in the course of the payor’s trade or business are reportable on the form 1099-NEC. If your neighbor pays you $1,000 to paint their house, that’s not Form 1099 income. They’re not in a trade or business related to the payment. But it still may be taxable income.

1099 forms were created by the Internal Revenue Service (IRS). They contain tax information you need when you file your annual return. The IRS has created several separate Form 1099s for different types of income. Some of the most common ones include:

• Form 1099-NEC to report earnings from self-employment

• Form 1099-DIV to report dividend income

• Form 1099-INT to report interest income

• Form 1099-MISC to report miscellaneous compensation (Prior to 2020, all self-employment earnings were reported on this form. It now exists for other types of income.)

• Form 1099-G to report certain government payments, including unemployment benefits

There are more, but those are some commonly used ones. The handy naming convention is helpful when locating where to report the income on your federal tax return.      

Reporting Form 1099 Income to Your Unemployment Office 

If you're collecting unemployment insurance benefits, you must report any source of income you receive. This includes Form 1099-NEC income. The earnings must be submitted to your unemployment office when you file your claims. Claimants who fail to do so can face serious consequences. Intentionally failing to report earnings can result in having your benefits denied, having to repay benefits, and being subject to penalties. This will be determined by state law. It’s okay to get the work, you just need to remember to report the income.   

Typically, the income you report will reduce your benefits, but only during the week that you earned it. Many states have a formula they use to determine the reduced benefit amount. Unemployment laws vary by state, so it's important that you are aware of your state's rules. 

If you receive unemployment compensation, your state’s Department of Labor will send you a Form 1099-G (titled “Certain Government Payments”). This IRS form will show the state and federal benefits you received during your tax year. You’ll need to report this amount on your federal tax return. You have to pay federal income taxes on most state-funded unemployment payments you receive. You must also include this income on many state tax returns. If you receive a Form 1099-G for benefits you didn’t actually receive, you may be the unfortunate victim of identity theft. Don’t report the income, but do contact your state Department of Labor.   

Are Self-Employed Individuals Eligible for Unemployment Benefits? 

Workers receiving a Form 1099 typically don’t qualify for unemployment benefits. These benefits are available to employees because their employers pay state and federal unemployment taxes. This money is used to help fund the state’s unemployment payments. Self-employed individuals don’t pay these taxes, which is why they often don’t have access to the benefits.

Let's Summarize... 

If you’re self-employed, you should receive a Form 1099 for the income you receive.  Businesses that paid you are required to prepare a Form 1099-NEC and send it to you by January 31 of the following year. Workers receiving a Form 1099-NEC include independent contractors, contract workers, freelancers, and gig workers. Unlike these workers, employees receive a Form W-2 for the income they receive. 

If you’re filing an unemployment claim or already receiving benefits, you must report all income received to your employment office. This includes both Form 1099 and Form W-2 income. Workers receiving a Form 1099 typically don’t qualify for unemployment benefits. That changed with COVID-19 and the enactment of the CARES Act in March 2020. It opened the door for such workers to receive benefits. Unfortunately for a lot of unemployed workers, those benefits expired on September 5, 2021.