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How to File Taxes with IRS Form 1099-NEC

Updated for Tax Year 2021 / December 8, 2021 09:38 AM


OVERVIEW

If you receive tax form 1099-NEC for services you provide to a client as an independent contractor and the annual payments you receive total $400 or more, you'll need to file your taxes a little differently than a taxpayer who only receives regular employment income reported on a W-2.


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One of the most common reasons you’d receive tax form 1099-NEC (Form 1099-MISC in prior years) is if you're self-employed or did work as an independent contractor during the previous year. The IRS refers to this as “nonemployee compensation.”

  • In most circumstances, your clients are required to issue Form 1099-NEC when they pay you $600 or more in any year.
  • If you receive payments through online payment services such as PayPal, you might receive form  1099-K in addition to Form 1099-NEC.
  • As a self-employed person, you're required to report your self-employment income if the amount you receive from all sources totals $400 or more.

The process of filing your taxes with Form 1099-NEC is a little different than if you only had income reported on a W-2. Here's some tips to help you file.

Under the American Rescue Plan, changes were made to Form 1099-K reporting requirements for third-party payment networks like Venmo and Cash App that process credit/debit card payments or electronic payment transfers. The change begins with transactions starting January 2022, so it doesn’t impact 2021 taxes. Beginning with tax year 2022 if someone receives payment for goods and services through a third- party payment network, their income will be reported on Form 1099-K if $600 or more was processed as opposed to the current Form 1099-K reporting requirement of 200 transactions and $20,000. This change could impact people working in the gig economy, online sellers, independent contractors, and other self-employed business owners.  

Taking deductions

One of the nice things about receiving a 1099-NEC rather than a W-2 is you can claim deductions on your Schedule C, which you use to calculate your net profits from self-employment.

Your deductions must be for business expenses that the IRS considers ordinary and necessary for your self-employment activities.

  • An expense is ordinary if it's incurred by self-employed individuals in a similar field.
  • An expense is necessary if it's helpful to you in completing your work. An expense does not have to be essential to be necessary.

For example, the cost of sophisticated computer software is an ordinary and necessary expense for a freelance graphic designer. On the other hand, the cost of hiring a limousine to travel to clients may be helpful, but is not ordinary by tax standards.

When you use Schedule C, you will typically calculate your net profit by:

  1. Taking your total self-employment income, including those earnings not reported on a 1099-NEC, and
  2. subtracting the deductible business expenses you incur.

The final net profit figure must be transferred to Form 1040 and combined with your other earnings to calculate your taxable income.

Self-employment taxes

As a self-employed individual, you must pay Social Security and Medicare taxes. However, since your 1099-NEC income is not subject to employment-tax withholding, you're required to pay these taxes yourself.

  • These taxes are calculated on a Schedule SE, which must be attached to your tax return.
  • Only the net profit reported on Schedule C is calculated into the self-employment taxes on Schedule SE.
  • Earnings such as investment income are not subject to Social Security and Medicare taxes.

Estimated tax payments

One thing you’ll notice on your 1099-NEC forms is that your clients don’t withhold income tax from your payments like they do for their employees. This does not mean, however, that you can wait until you prepare your tax return to pay 100% of the income tax you owe. Instead, you may have an obligation to make up to four estimated tax payments to the IRS during the year.

The amount and frequency of your estimated payments depends on,

  • How much income you earn,
  • the tax withheld from other employment income, and
  • the method you choose to calculate your estimated taxes.

Use Form 1040-ES to figure out your estimated tax obligations.

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