One reason why you get a 1099-MISC tax form is if you are working as an independent contractor on the past year or if you are self employed. The IRS basically refers this as non employee compensation. Most of the time, your clients need to issue a 1099-MISC form when they are paying you 600 dollars or more in a year. As being self employed, you have to report yourself to the employment income if the amount you get from all sources have totaled to 400 dollars or maybe more.
In regards to this matter, the process of filing and calculating tax on 1099-MISC tax will be a bit different compared to those taxpayers who are receiving regular employment income that is reported on W-2. But what others don’t know is that, they can reap a number of benefits by filing tax on 1099-MISC.
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. However, you should set the deductions as business expense because this is the only way for the IRS to consider it as necessary for the activities you do as a self employed.
Expense is ordinary if it’s incurred by self-employed worker in similar field – the things you spend on your job to complete it is all considered necessary. Expenses don’t need to be essential for it to be 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. The cost of getting a limousine service to go to your clients on the other hand may be useful but it is not ordinary by tax standards.
You can even file shorter Schedule C-EZ if your business is raking expenses of equivalent or less than 5000 dollars. Whether you are using Schedule C or C-EZ, you’ll have to calculate tax on 1099-MISC and subtract deductible business expenses you’ve incurred. Then, your final net profit should be transferred to a Form 1040 and have it combined with other earnings in order to figure out your taxable income.
Given that you’re a self-employed person, you should pay Medicare and Social Security taxes. 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.