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. But COVID-19 changed a lot of things, including who was eligible for unemployment benefits.

Due to challenges brought on by COVID-19, the Coronavirus Aid, Response, and Economic Security (CARES) Act was passed in March 2020. This authorized roughly $2 trillion to fight COVID-19 and its negative economic effects. It provided a variety of relief programs to help individuals and businesses.   

It also greatly expanded unemployment benefits temporarily. All of the programs were federally funded. As the pandemic pressed on, these programs were extended with subsequent legislation. All are now expired. These programs included:

• The Pandemic Unemployment Assistance Program (PUA): This program extended benefits to individuals who weren’t previously eligible. This included workers receiving a Form 1099, such as independent contractors and freelancers. To qualify, you had to be unemployed, partially unemployed, or unable to work because of COVID-19. This could mean you had to care for someone diagnosed with COVID-19, you weren’t able to reach your place of employment, or your place of employment was closed due to COVID-19.

• Pandemic Emergency Unemployment Compensation (PEUC): This program extended the weekly benefits for claimants who exhausted the benefits they were entitled to under state law. States typically offer 26 weeks of benefits and this program authorized up to 53 weeks of benefits.  

• Pandemic Unemployment Compensation (PUC): This program initially provided an additional $600 of weekly benefits on top of regular benefits. After it was extended, the amount was reduced to $300. It applied to all unemployment recipients, even those receiving benefits under the PUA program. That meant the weekly benefit for self-employed workers equaled the weekly amount the individual would receive under state law plus an additional $600. 

You couldn’t claim certain benefits if you quit your job or declined suitable employment, which some people may have thought about doing in order to receive the benefits. There are also rules for when you get a job while on unemployment that generally continued to apply while the relief benefits were available. But the requirement to actively search for work was temporarily suspended or relaxed. If you did find work while the relief benefits were available, the income reporting rules usually applied. In other words, the Form 1099 income or W-2 income, had to be reported to your state’s unemployment office. All of these rules and eligibility requirements are administered at the state level and often vary from state to state.    

Like many good federal government programs, the CARES Act expired, and all of these programs ended on or before September 4, 2021. Many states terminated the programs prior to that date to encourage people back into the workforce. With the expiration of the CARES Act, self-employed workers are no longer entitled to unemployment benefits. The expiration of these benefits hit millions of Americans very hard. Keep an eye out for future coronavirus-related 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.