Receiving a Form 1099-MISC, instead of the standard Form W-2, means that the company or person paying you regards you as an independent contractor, and you will be considered self-employed for tax filing purposes. If you’re not familiar with this type of filing, learn how to be in compliance to be sure you file correctly with the IRS. In some instances, you may be unsure of your filing status, or believe a payer has assessed your status incorrectly. In this case, file Form SS-8 with the IRS and let it help make that determination for you.
Nonemployee compensation on a 1099 refers to money paid to you as an independent contractor rather than as an employee. You will still need to pay taxes on this money and report it as self-employment income on your tax return.
Nonemployee Compensation vs Employee Status
For tax purposes, one of the main differences between an employee versus a non-employee is whether payroll taxes are being withheld every pay period. Independent contractors have no automatic withholdings deducted from any monies paid to them by a company. An employee, however, will have an employer automatically withhold these payroll taxes from each paycheck, unless the employee opts to have none withheld.
In addition, independent contractors complete a Form W-9 to provide to the payer, while employees fill out a W-4 to list their withholdings and allowances. If you are an independent contractor, no allowances for yourself, dependents and spouse, or withholdings such as social security and Medicare, will be deducted from your paycheck. Come tax time, you are solely responsible for making sure you take care of your tax obligations to the IRS.
Sometimes, the differences between non-employees or independent contractors and employees are quite subtle. Often, an independent contractor works right alongside employees and performs the same tasks a full employee does. However, as an independent contractor, you won’t receive benefits such as 401(k) contribution or health insurance like employees do. Unlike employees, as an independent contractor, you generally can claim more deductions because you're responsible for most of your own work-related expenses. Things such as maintaining a home office space, work-related travel, continuing education related to your work, or any equipment you need for your job are all deductible. Check with the IRS' website for specific rules on eligible work-related deductions.
Do I Have to Fill Out a W-9?
While Form W-9 is used in a variety of tax preparation situations, if you receive a W-9 to fill out, chances are you’re an independent contractor. Payers must give independent contractors a W-9, Request for Taxpayer Identification Number and Certification, to fill out before completing any work for the company. This form is never actually sent to the IRS, but it is rather kept on file by the payer and used to request the personal information and Taxpayer Identification Number (Social Security Number or Employer Identification Number) of a contractor.
Businesses are required to keep W-9s on file for up to four years in the event any questions arise from the contractor or the IRS. The information you provided on the W-9 is used by the payer when the time comes to report payments you've received in a tax year. If you were paid more than $600 during the course of the tax year, the payer is required to send Form 1099-MISC to the IRS, in addition to supplying you with a copy.
1099-MISC and the Schedule C
Nonemployee compensation is reported on Form 1099-MISC and represents any earnings paid to you by a company when you are not acting in the capacity of an employee. Payments under $600 in a given tax year are not required to be reported by the payer, so he may not file a 1099-MISC for you. However, this doesn’t mean you're off the hook for reporting the income you earned as an independent contractor to the IRS. If you do not receive your 1099 from a payer in a timely manner and are due one, you must contact him to ask for a duplicate. Be sure to confirm your current address with the payer. You can also call the IRS directly to obtain the information.
Form 1099-MISC reports your nonemployee compensation in box seven. This is the amount paid to you by a particular payer for a given tax year. As an independent contractor, you will receive a 1099-MISC from each company you provided more than $600 in services for. You will then need to report this income on Schedule C found on Form 1040, Profit or Loss for Business (Sole Proprietorship).
Self-Employment Tax and Schedule SE
Self-employment taxes are Medicare and Social Security withholdings that would typically be deducted by an employer unless the employee chooses to have no taxes withheld. In addition to Schedule C, you will also likely need to file Schedule SE, Self-Employment Tax. This is required when you have earned more than $400 in a tax year in net earnings from your self-employment income, or if you’ve earned more than $108.28 as a church employee.
The Social Security Administration uses the information from Schedule SE to determine your benefits under the Social Security program. Regardless of your age, this is a tax that applies even if you currently receive Social Security or Medicare benefits. If you’re unsure how to complete this, or any other section of your 1040, a quick search online provides calculators and instruction worksheets. You can also always consult with a qualified tax professional for more assistance.
Understanding Estimated Tax Payments
Because no taxes are being withheld from your paycheck, you could be in for a big surprise when tax season rolls around if you haven't planned accordingly. To avoid this, self-employed taxpayers often pay quarterly estimated taxes. The IRS maintains a timetable of when taxpayers should remit their estimated tax payments. Generally due each year on the 15th day of April, June, September and January, estimated taxes are the estimated amount of taxes you would have paid if your withholdings were coming out of your paycheck automatically.
Making sure you pay enough estimated tax, and in a timely manner, is very important. If you’re late or do not make estimated tax payments at all, you may face penalties – regardless of whether you’re due a refund or not. Use Form 1040-ES to make the estimated tax payments if you expect to owe more than $1,000 in taxes for the tax year. While the standard Form 1040 is used to file taxes for the previous year, the 1040-ES is used to pay your estimated tax payments for the current year.
- IRS: Forms and Associated Taxes for Independent Contractors
- TurboTax: What Is IRS Form W-9?
- IRS: 2018 Instructions for Schedule SE (Form 1040)
- IRS: Estimated Taxes
- Bankrate: The Skinny on Paying Estimated Taxes: What You Need to Know to Avoid the Ire of the IRS
- TurboTax: What is IRS Form 1040-ES: Estimated Tax for Individuals?
- IRS: About Form SS-8
- Internal Revenue Service. "Understanding Employee vs. Contractor Designation." Accessed Oct. 28, 2019.
- Internal Revenue Service: "IRS Issues Standard Mileage Rates for 2019." Accessed Oct. 28, 2019.
Tara Thomas is a Los Angeles-based writer and avid world traveler. Her articles appear in various online publications, including Sapling, PocketSense, Zacks, Livestrong, Modern Mom and SF Gate. Thomas has a Bachelor of Science in marine biology from California State University, Long Beach and spent 10 years as a mortgage consultant.