Either self employed or working as an independent contractor for the past few years, then rest assure to receive a 1099-MISC tax form. 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.
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 – depending on your Schedule C, you can claim your deductions that comes to your 1099-MISC than a w-2. 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. Expenses don’t need to be essential for it to be necessary. As a simple example, if you are working as a graphic designer, then it just becomes necessary for you to invest in complex and state of the art computer software. However, the cost of hiring limousine service to go to clients might be useful but isn’t ordinary by the 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.
Since you’re a self-employed individual, you take the responsibility to pay for Medicare and Social Security taxes. Since your 1099-MISC income tax on the other hand is not subjected to self employment tax withholding, then you must calculate and pay such taxes on your own. Just the net profit reported on the Schedule C will be calculated to the self-employment taxes on the Schedule SE.