IRS Form 1099 MISC Reporting Self-Employment Income

If you receive a 1099 MISC for services that you provide to a client as an independent contractor and annual payments that you receive total $ 400 or more, you need to present your taxes in a slightly different way than a taxpayer receiving a regular income as an employee reported in a W2 form.

Reporting Income on 1099-MISC

It is very important to report income on a 1099 MISC to the IRS because the person issuing the 1099 MISC will also be sending that information to the IRS

 

Who pays self-employment tax?

Self employment tax is a replacement to social security tax and Medicare tax. He would have paid that if he was an employee anyway, the reason it sounds like a lot is because the employer pays half, and as such the self employed pay both halves, and he’s paying it all at once rather than out of each check.

 

What to do if you receive a 1099-MISC?

  • not report the income, which is illegal, but it doesn’t sound like there is much chance of being caught. The fine if you are caught is far worse than the tax though, so keep that in mind. No one ever goes to jail for this, but it still isn’t sunshine and roses.
  • report as a self employed sub contractor, take all the deductions you are eligible for (which may be a lot since you’re a company now), and pay the tax. Not the best choice, but depending on the deductions, might not be that bad.
  • report as an employee incorrectly filled as subcontractor, (this is “technically” what sounds like the most correct choice) which would require you to pay your half, no extra deductions for being a business, and the IRS would go after the employer for the other half, and likely scrutinize all his other employees’ statuses as nonemployees, then local authorities might question the pay rate as well.

 

When to File 1099-MISC

File this form for each person to whom you have paid during the year:

  • at least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest;
  • at least $600 in rents, services (including parts and materials), prizes and awards, other income payments, medical and health care payments, crop insurance proceeds, cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish, or, generally, the cash paid from a notional principal contract to an individual, partnership, or estate;
  • any fishing boat proceeds,
  • gross proceeds of $600, or more paid to an attorney during the year, or
  • withheld any federal income tax under the backup withholding rules regardless of the amount of the payment.

Direct Sellers and Form 1099-MISC

Also, use this form to report that you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.

Penalties for not reporting Form 1099-MISC

If you receive a Form 1099-MISC that reports your miscellaneous income and you don’t include the income on your tax return, you may also be subject to a penalty. Failing to report income may cause your return to understate your tax liability. If this occurs, the IRS may impose an accuracy-related penalty that is equal to 20 percent of your underpayment. As an example, if the failure to include your miscellaneous income caused you to understate your tax liability by $500, your penalty would be $100 ($500 x .20 = $100).