The 1099-MISC is one of the most misunderstood forms on a tax return. The 1099-MISC, like the W-2, reports money that you were paid for employment. (I’m talking about the type of income where you had a J.O.B., not retirement, pensions, dividends, interest, or capital gains)
The W-2 is pretty straight forward. It reports your wages, the amount of federal, social security, and medicare that were withheld. If you set your W-4 up correctly the idea is that the amount of federal withholding will cover the amount of tax you owe at the end of the year. That sentence is pretty important. If you under withhold, you’ll owe taxes at the end of the year. If you over withhold, you’ll probably get a refund. Notice the probably. There are exceptions to every rule.
The 1099-MISC is reasonably straight forward if you understand it. It’s my experience that a LOT of people do not. Here are some examples of people who receive a 1099-MISC: contract laborers, Tupperware/clothing/skin care sellers, some security jobs, dog groomers, photographers, writers, consultants, and a host of others.
Probably the most common misconception is that if you make less than $600, and don’t receive a 1099-MISC, you don’t have to report that income. That’s just NOT TRUE. You are responsible for reporting ALL income regardless of whether or not you received a 1099-MISC. Payors are not required to issue you a 1099-MISC if you made under $600, but you are required to report it if you earned it. The word to the wise here is to keep track of your earnings. Don’t think the IRS won’t know about that income just because you didn’t receive a 1099-MISC. Down that path lies foolishness.
The next misconception is that you earned that money and you get to keep all of it. Not necessarily so. A 1099-MISC is a reporting document. It tells how much money you made doing the sorts of things the government considers to be self-employment. That means you have to pay a self-employment tax on the amount you earned. That self employment tax covers some of the same things a W-2 does. It covers social security and medicare – something we all want when we eventually get older. However, be forewarned, the self employment tax does not pay federal withholding. So, you’ll not only need to pay self employment tax, but you’ll also need to pay Uncle Sam. The amount you pay depends on your deductions, but that’s another blog post.
How can you avoid all the stress of owing money at tax time? It’s pretty simple really. Keep all your receipts for your business (think deductions) and set aside money each time you receive a paycheck. (20% is a good figure) Save that money until April 15th and use it to pay your self employment tax. It’s hard to be disciplined enough to hold that money back, but you’re really doing yourself a favor and won’t come up short in April.
Keep an eye out for a blog post about self employment deductions!