Either self employed or working as an independent contractor for the past few years, then rest assure to receive a 1099-MISC tax form. As a matter of fact, the IRS refer this as 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. 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.
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 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. Here you use it to be able to calculate tax on 1099-MISC and know your net 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. Read more about 1099-MISC Taxation here.
Expense is ordinary if it’s incurred by self-employed worker in similar field – if expenses are needed to complete your job, then that’s considered necessary. Expenses don’t need to be essential for it to be necessary. 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. Check out this website at https://www.britannica.com/topic/progressive-tax and learn more about taxes.
You can also file shorter Schedule C-EZ if for example that your business rakes expenses of 5000 dollars or less. It doesn’t matter if you’re making use of Schedule C or C-EZ because at the end of the day, you have to calculate tax on 1099-MISC and then, subtract all deductible business expenses that you 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 Tax on the other hand is not subjected to self employment tax withholding, then you must calculate and pay such taxes on your own. Only the net profit reported on Schedule C is calculated to self employment taxes on Schedule SE.