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. 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. As being a self employed individual, you’re required to report yourself to employment income if for example the amount you get from all your sources totaled to 400 dollars or maybe more.
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 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. The deductions should be for business expenses and the IRS will consider ordinary as well as necessary for your activities being 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. For your expenses to become necessary, it doesn’t actually have to be essential. 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.
You have the responsibility to pay for Medicare and Social Security taxes given that you’re working as self-employed. 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.