Working on multiple different projects and jobs is exciting, but it can sometimes lead to a chaotic stack of 1099 forms come tax season. And while ‘tax season’ probably isn’t anyone’s favorite phrase—even accountants—it’s not as complicated as it may seem, especially if you prepare in advance. There is always a learning curve when changing your employment, and the shift to self-employment isn’t an exception; yet, it doesn’t need to be scary or complicated.
Let’s start with the basics and move into the step-by-step process of making it simple.
What is a 1099 Form?
1099s are federal income tax forms sent from businesses or other institutions, documenting financial transactions during a specific tax year. Copies are sent to individual taxpayers to help them calculate their taxes accurately across various sources of income. 1099 forms are filed with the U.S. Internal Revenue Service (IRS) and with state tax departments, if required.
How is a 1099 different from a W-2?
W-2 forms report wages, salaries and tips, provided to full-time or “traditional” employees.
1099s report earnings and proceeds outside of traditional wages or salaries, provided to self-employed, freelancers, and contractors.
Who needs to file and how?
If you received a 1099 or multiple 1099s, you will be required to file your taxes differently than someone who received income through a W-2. As a self-employed person, you’re required to report income if the amount received from all sources is greater than $400.
There are more than 20 versions of the 1099 form. 1099-MISC, for miscellaneous income, and 1099-NEC, for self-employed income, are the most widely known. As of 2020, Form 1099-NEC will be the most common form used for reporting non-employee compensation. Clients are required to issue a Form 1099-NEC if they paid you more than $600 in a year.
How do you file your taxes with a 1099 or multiple 1099 forms?
Taxes aren't automatically withheld from 1099 income like they are from W-2 income. Instead, individuals who receive a 1099 are expected to prepare their taxes, withholding and paying the appropriate federal and state income tax amount on their own.
Individuals should use these 1099 documents to prepare their own personal income tax returns— typically due by April 15. Adopting a “personal payroll”— estimating and automatically withholding and paying taxes beforehand—can help avoid having a surprise tax bill at the end of the tax season. If you haven’t already set aside money for taxes, it’s not too late to start, especially for the next financial year. In the meantime…
Here is a step-by-step breakdown of how multiple 1099 holders can prepare for tax season:
Consolidate your 1099s and various income sources
For many of us, our income is fragmented, coming from various businesses, projects, and payment sources. The best place to start is by tracking your work. Remember: each job—with payment of more than $600 is obligated to provide you with a 1099-NEC. Consolidate all of your 1099 Forms together before you sit down to actually file your taxes. Organize them from oldest to most recent to save you from flipping papers and potentially failing to report something.
Review Expenses for Deductions
If you’re receiving one 1099 (or multiple), you can claim deductions on your Schedule C to help you calculate your net profiles from self-employment. Deductions can be made for business expenses that the IRS considers both ordinary and necessary for your activities as self-employed. Let’s dive into this a bit more:
An ordinary expense is something that would be incurred by other self-employed individuals in the same or a similar field.
A necessary expense is something that is helpful in completing your work. It doesn’t necessarily have to be essential.
Here are a few examples. You’re a hairstylist and you purchase new cutting shears. You’re a graphic designer and purchase editing and creative software. You’re a freelance writer and purchase grammar editing software.
A few common deductions include:
Your portion of your home that you use as your office
Mileage on your car
The cost of training or educational courses
Business-related dues and subscriptions
Once you have totalled your income and subtracted your deductions, using your Schedule C, you’re able to calculate your net profit. This final net profit amount is what should be transferred to Form 1040 to calculate your taxable income.
From Schedule C to Schedule SE
Social Security and Medicare taxes are still applicable to self-employed individuals and have not been withheld. These taxes are in Schedule SE and must be included in your tax return. Note: only the net profit from Schedule C is calculated in Schedule SE.
Start Preparing for Next Year
Use Form 1040-ES to figure out your estimated tax obligations as you may be obligated to make up 4 estimated tax payments to the IRS throughout the year. These are quarterly payments and requirements, but also help you avoid hefty tax repayment amounts.
Being self-employed offers tons of freedom, but one of the greatest lessons is balancing that freedom with control. Putting processes into place that can help you estimate and financially prepare are essential. Personal payroll services like Catch allow you to automatically withhold your estimated 1099 taxes from income and you’ll never have to track, trace, and manage fragmented payments again.