The Internal Revenue Service requires individuals and entities that make certain types of payments to you during the year to report them on a 1099-MISC form. This form is used for a wide range of transactions, but it’s most frequently used to report payments of nonemployee compensation to self-employed taxpayers. Therefore, if you earn a living as a freelancer, contractor or sole proprietor rather than as an employee, you’ll need to know how to file your tax return using the information reported on your 1099-MISC forms.
1. Gather all 1099-MISC forms you have received. Every client who makes annual payments to you totaling $600 or more has an obligation to send you a 1099-MISC no later than Jan. 31 of the following tax year. Therefore, if you earn money from various clients, you’ll need all of their 1099-MISC forms before you can prepare your tax return.
2. Add the amounts reported in box 7 of each form. Box 7 on the 1099-MISC form is where you will find the total nonemployee compensation you earned from each client.
3. Obtain the necessary income tax forms. You will need to obtain copies of the 1040, Schedule C (or Schedule C-EZ) and Schedule SE forms if you are not using tax preparation software to prepare your return. The IRS' website has all three forms, which you can fill out and save to your computer.
4. Prepare the Schedule C form. Receiving a 1099-MISC form with amounts reported in box 7 means that you must separately calculate your net profit from self employment on a Schedule C. Your net profit is equal to the payments reported on all 1099-MISC forms minus the deductions you take for expenses incurred that relate to your self employment. Transfer the net profit amount to the line titled “business income” on your 1040, and on the Schedule SE.
5. Prepare the Schedule SE. As a self-employed taxpayer, you’re responsible for paying Social Security and Medicare taxes in addition to income tax. Schedule SE calculates these taxes on your net profit and also computes the amount you can deduct on your 1040. Transfer the self-employment taxes to the “other taxes” section of your 1040 and report the deduction in the “adjusted gross income” section.
6. Complete the 1040 form. Report other sources of income that aren’t related to your self-employment. Completing the 1040 form also requires you to evaluate your eligibility to claim other deductions, dependent exemptions and whether you should claim the standard deduction or itemize before calculating your income tax bill for the year.
7. File your tax return with the IRS. The instructions to the 1040 form will provide the address where you can mail a paper copy of your return. Alternatively, the IRS offers several e-filing options.
- If the total of your deductible business expenses are $5,000 or less and you can satisfy a number of other requirements, you should consider filing the shorter Schedule C-EZ instead of Schedule C. As long as an expense is ordinary and necessary to your self-employment activities, you can take a deduction for it on Schedule C or C-EZ.
- In the event you don’t receive a 1099-MISC from a client within a few days of the deadline, you should contact them directly. However, if you still don’t receive it by Feb. 15, you can contact the IRS at 800-829-1040 for assistance.
- Despite the fact that you calculate your actual income tax liability on your 1099-MISC income after the tax year is over, it doesn’t mean that you can go the entire year without making a tax payment. The IRS requires self-employed taxpayers to make up to four estimated income tax payments during the year in which the income is earned. You may not have to make all four payments, but to make this determination you’ll need to prepare a 1040-ES.
- Although nonemployee compensation is the most common type of payment reported on 1099-MISC forms, there are other types of payments reported on it that may also be taxable and subject to reporting on your return. For example, certain types of rental income are reported in box 1, and if you’re an attorney, some of the payments you receive from clients will be reported in box 14.
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