Either self employed or working as an independent contractor for the past few years, then rest assure to receive a 1099-MISC tax form. Basically, this refers to IRS as a non employee compensation. In most cases, your clients have to issue 1099-MISC form when they’re paying you 600 dollars or maybe more in a year. Now if for instance that you’re a self employed and you received a cumulative income amounting to 400 dollars or maybe more, then you’re required to report to employment income.
For this reason, the entire process of calculating tax on 1099-MISC tax would vary than those taxpayers who are getting regular employment income reported on W-2. But being able to file tax on 1099-MISC comes with several benefits and these include but not limited to:
Taking deductions – one of the greatest things when it comes to receiving 1099-MISC compared to a w-2 is the fact that you are able to claim deduction as per your Schedule C. You can use this in order to calculate tax on 1099-MISC and have the chance to learn about your net profit as a self-employed individual. As for the deductions however, it ought to be for business expenses and the IRS then consider it as ordinary and necessary for your activities being self employed.
Expense is ordinary if it’s incurred by self-employed worker in similar field – if expenses are needed to complete your job, then that’s considered necessary. Expenses will not be essential for it to become necessary. To give you an example, the cost of buying a sophisticated and high-end computer software is a necessary expense for freelance graphic designers. But things are different if you are about to hire limousine service to go to clients can be very useful but it is not ordinary by tax standards.
You can also file shorter Schedule C-EZ if for example that your business rakes expenses of 5000 dollars or less. It doesn’t matter if you’re making use of Schedule C or C-EZ because at the end of the day, you have to calculate tax on 1099-MISC and then, subtract all deductible business expenses that you have incurred. Your final profit has to be transferred into a Form 1040 and combine it with other earnings to be able to find out your taxable income.
You have the responsibility to pay for Medicare and Social Security taxes given that you’re working as self-employed. However, because your 1099-MISC income tax isn’t subjected to self employment tax withholding, it will be you who have to calculate and pay taxes. Only the net profit reported on Schedule C is calculated to self employment taxes on Schedule SE.