Freelancers and contractors are expected to make up more than 50% of the workforce within the next decade. Knowing this, learning how to file 1099 MISC taxes will become important to more and more people. What is a 1099 MISC and does it apply to you during tax season?
If you're an independent contractor in any industry, and you received payments of $400 or more in the prior tax year, you'll receive a 1099 MISC for the services you provided to your client(s). This will force you to file your taxes a bit differently than an individual who receives a W-2 under traditional employment.
Filing 1099 taxes don't need to be overwhelming. Let's take a look at how to file.
When Are You Required to File 1099 MISC
As a self-employed independent contractor, the IRS lumps your income into something called "non-employee compensation." In the vast majority of situations, any client you work for is required to issue Form 1099 MISC if they've paid you $600 or more in the prior year. You are personally required to report your self-employment income from all sources totaling $400 or more.
How Your Tax Payments Work
The first thing you'll see on your 1099 MISC form is that your clients and customers don't withhold income tax from payments made to you. They haven't taken taxes out of each of your paychecks and pay stubs. Of course, this doesn't mean that you're free of any tax burden. It's best to be prepared and not wait until filing your taxes to pay 100% of what you owe the IRS.
Click here to create your paystub in less than 2 min!
Rather, you can make up to four estimated tax payments to the IRS each quarter throughout the year. The frequency and amount of your estimated tax payments will depend on the amount you earn, taxes withheld from other employment income, and the method you choose to calculate estimated taxes. The IRS puts out form 1040 ES to help calculate your estimated tax burden.
What About Social Security And Medicare Taxes?
When you're self-employed, you're still required to pay your Social Security and Medicare taxes. However, seeing as your 1099 MISC isn't subject to a self-employment tax withholding, you'll need to calculate and pay these on your own. Social Security and Medicare taxes will appear on a Schedule SE. You'll need to attach this to your return.
Note that only the net profit that's reported on Schedule C should be calculated into the self-employment taxes on your Schedule SE. If you have earnings like investment income, it's not subject to Social Security or Medicare taxes.
Don't Forget To Deduct
One of the major advantages to filing a 1099 MISC rather than a W-2 is that you can claim deductions on your Schedule C. These are used to calculate net profits from your self-employment. Of course, all expenses deducted need to be business expenses that the IRS considers "necessary and ordinary" for your business activities.
Simply stated, an expense is necessary if it's helpful to complete your work. However, it's doesn't need to be essential to be considered necessary. As an example, as a freelance Graphic Designer, the expense of sophisticated software systems is considered an ordinary and necessary expense for your job. Conversely, hiring a limo to drive clients to lunch may be helpful to your business, but is not considered ordinary by tax standards.
If your deductible expenses are $5,000 or less for the year, you can file Schedule C-EZ rather than Schedule C.
Learning How to File 1099 MISC Isn't Difficult
If this is your first year as a self-employed contractor, learning how to file 1099 MISC may have seemed overwhelming. However, after learning these basics, you should be well on your way. Do you have further questions? Don't hesitate to contact us and we can point you to the resources you'll need.
How about starting on your first pay stub? Let's help you create a pay stub and get started on gathering your documents.