Individuals who work as employees typically receive a Form W-2 after the close of the year for tax purposes. Some workers, however, are not technically classified as employees and are issued a Form 1099-MISC instead. The tax preparation process for workers who receive a Form 1099-MISC is usually a bit more involved than the process for a W-2 recipient.
Form 1099-MISC is just one in a series of 1099 forms produced by the IRS. The 1099-MISC is one of the most widely used forms in the 1099 series due to the several miscellaneous categories of revenue reportable on it. Workers who receive a Form 1099-MISC due to earned income are considered to be an independent contractor, rather than an employee.
Form 1099-MISC layout
There are several different entry boxes on Form 1099-MISC for various categories of revenue, so make note of where your earnings are reported on the form. Income received for personal work is usually reported in box 7 of Form 1099-MISC as "nonemployee compensation." There is a separate entry box labeled as "other income," but that box is typically not used for personal services rendered.
Nonemployee compensation is essentially self-employment income. The income is entered on IRS Schedule C, which is a supporting schedule for Form 1040. If your net income from self-employment is $400 or more, the net earnings are also subject to self-employment tax in addition to income tax. Self-employment tax is calculated on Schedule SE and then entered on Form 1040.
Self-employment tax consists of both Social Security tax and Medicare tax. Because there is no employer to pay a matching portion, self-employed individuals are subject to a higher rate for Social Security and Medicare taxes than employees who receive a W-2. For a self-employed person, the Social Security tax rate is 12.4 percent and the Medicare tax rate is 2.9 percent.
Noncontinuous earning activity
In some instances, nonemployee compensation reported in box 7 of Form 1099-MISC may not be subject to self-employment tax. If the activity for which you received payment is not regular and continuous, you may be able to simply report the earnings on line 21 of Form 1040 as other income. If you don't report the income on Schedule C, any expenses incurred in connection to the activity are deductible only if you itemize deductions.
If you have expenses for an ongoing trade or business, those costs can be deducted on Schedule C to offset the earnings. Contact an accountant who specializes in taxes for more information on how the receipt of Form 1099-MISC affects your income tax return.Share