Among the common reasons why you are receiving 1099-MISC tax form is if you did work as independent contractor on the previous year or if you’re a self-employed. Basically, this refers to IRS as a non employee compensation. If for example that your clients are paying you above 600 dollars, then they should be issuing you a 1099-MISC form. 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.
In relation to this, the process of filing and calculating tax on 1099-MISC tax is going to be different in comparison to taxpayers who receive regular employment income that’s 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 – depending on your Schedule C, you can claim your deductions that comes to your 1099-MISC than a w-2. Here, you can use it in calculating tax on 1099-MISC and be able to know your profit from being self employed. 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 will not be essential for it to become necessary. As an example, the purchasing cost of high end and sophisticated computer software is 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. Whether you use Schedule C or C-EZ, you need to calculate tax on 1099-MISC and then, subtract deductible business expense that have 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. On the other hand, because your 1099-MISC income tax isn’t subject to self-employment tax withholding, you have to calculate and pay such taxes yourself. On Schedule SE, it is just the net profit on Schedule C is calculated.