When you receive a 1099
When you receive a 1099 MISC, it is because you have provided a service to a business owner and they are required to provide you and the IRS documentation of that service. A 1099 is a tax return document used to report miscellaneous payments made to non employee individuals, such as independent contractors, during the calendar year.
If you are the Business Owner, then a Form 1099-MISC should be filed for each person to whom you paid one or more of the following:
- At least $600 in services, rents, prizes or awards and other income payments.
- At least $10 in royalties or broker payments in lieu of dividends of tax-exempt interest.
- Gross proceeds to an attorney.
- The result of direct sales of at least $5,000 of consumer products for resale anywhere other than a permanent retail establishment.
- Each person from whom the employer has withheld federal income tax under the backup withholding rules.
Don’t forget about the state taxes, they may have an equivalent filing requirement or form, so employers should check state tax law for compliance.
One of the nice things about receiving a 1099-MISC rather than a W-2 is you can claim deductions on your Schedule C, which you use to calculate your net profits from self-employment. The deductions must be for business expenses the IRS considers ordinary and necessary for your self-employment activities. But one of the not so nice things is you are solely responsible for the 15.3% self employed tax on the income earned.
The expenses you incur to earn the income can be written off, an expense is ordinary if it is incurred by self-employed individuals in a similar field and an expense is necessary if it is helpful to you in completing your work.
An expense does not have to be essential to be necessary. For example, the cost of sophisticated computer software is n ordinary and necessary expense for a freelance graphic designer. On the other hand, the cost of hiring a limousine to travel to clients may be helpful, but is not ordinary by tax standards.
Love LaQuitta, xoxo