One of the most common reasons you’d receive tax form 1099-MISC is if you are self-employed or did work as an independent contractor during the previous year. The IRS refers to this as “non-employee compensation.” In most circumstances, your clients are required to issue Form 1099-MISC when they pay you $600 or more in any year. As a self employed person you are required to report your self employment income if the amount you receive from all sources totals $400 or more. In this situation ,the process of filing your taxes is a little different than a taxpayer who only receives regular employment income reported on a W-2.
One of the nice things about receiving a 1099-MISC 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. The deductions must be for business expenses the Internal Revenue Service considers ordinary and necessary for your self-employment activities. An expense is ordinary if it is incurred by self-employed individuals in a similar field. An expense is necessary if it is 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.
You can file the shorter Schedule C-EZ if your deductible business expenses are $5,000 or less. Whether you use Schedule C or C-EZ, you will calculate your net profit by taking your total self-employment income, including those earnings not reported on a 1099-MISC, and 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.
As a self-employed individual, you must pay Social Security and Medicare taxes. However, since your 1099-MISC income is not subject to self-employment tax withholding, you are required to calculate and pay these taxes yourself. These taxes appear 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-MISC 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 percent 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.