The Amazing 1099 Checklist for Preparing Your Federal Taxes as an Independent Contractor
Working for yourself can often be a satisfying and liberating experience when compared to working as a traditional employee. You can usually keep your own hours and have the freedom to accept or reject work for any reason you choose.
However, working for yourself can be more frustrating than working as someone else’s employee when it comes to taxes. Employees receive a simple Form W-2 from their employer that often contains most of the information they need to fill out their tax return. But as an independent contractor, you will need to collect and file Form 1099 from each client you worked for in the previous year as well as then use those forms, along with your own records, to fill out and file your income tax return.
While using Forms 1099 to prepare and file your federal taxes each year takes more effort than it does for a traditional employee, it should not be a stressful experience. To help, we have collected some helpful tax tips and a handy checklist to ensure that you have the information you need to file your taxes using the Forms 1099 you have received from clients.
You Maybe Seeing a New Form 1099
If you have been self-employed for a few years you have likely worked with Forms 1099-MISC in the past. That had long been the default information returns used by businesses to report non-employee compensation payments. That changed this year when the Internal Revenue Service introduced a new Form 1099-NEC informational return for reporting non-employee compensation paid during the 2020 calendar year.
Businesses will continue to report some payments using a revised Form 1099-MISC, but the new Form 1099-NEC allows for the separate reporting of payments for services rendered by self-employed individuals. The Form 1099-MISC will still be used to report payments for such things as rent, medical payments, consumer goods for resale, and royalties.
Just like with the Form 1099-MISC, the Form 1099-NEC is not used to report payments of less than $600 over the course of a year. If a client business pays the independent contractor less than $600 they are still required to report the income to the IRS, it is just that the client is not required to issue a Form 1099.
To prepare either Form 1099 your client will need your taxpayer identification number (TIN), which you will generally provide to them using a Form W-9 when you begin work. If you are a self-employed individual or sole proprietor, you will provide your Social Security number for the Form W-9. If you are operating as a partnership, corporation, or limited liability company (LLC), you will provide your employer identification number (EIN).
Paying Taxes as an Independent Contractor
The IRS will treat freelancers and independent contractors as self-employed individuals or business owners, which means you will be subject to different payment and filing rules than an employee. While businesses that pay you less than $600 are not required to issue you a Form 1099, you will be required to file a tax return with the IRS showing any income you have received if you earn $400 or more from self-employment during a year.
You will file your individual returns using the same Form 1040 you would use if you filed as an employee, but you will use a Schedule C to calculate your business’s net income or loss. If you have less than $5,000 in business expenses, you can file using a Schedule C-EZ if you meet the following criteria:
- Your business did not have a net loss
- You have no employees
- You have no inventory
- You are not claiming a deduction for the business use of your home
- You have only one business
- You use the cash method of accounting
Since you are self-employed, you will be required to pay the 15.3% self-employment tax. The self-employment tax is used to collect your contributions to Social Security and Medicare. If you were an employee you would only pay half of that amount because your employer contributes the other half. But since you are self-employed you will need to make the required payments as both the employee and employer. You will calculate the self-employment tax due using the Form 1040 Schedule SE.
Estimated Quarterly Taxes
When you are self-employed and expect to owe taxes of $1,000 or more when you file your annual return, the IRS will require you to make estimated quarterly tax payments. These payments take the place of the tax withholdings an employer would make on your behalf and spread your tax payments out over the course of the year so that you will not need to pay your entire tax bill in April.
You should use Form 1040-ES to calculate the estimated taxes for your small business or this free estimated tax calculator. For more information on calculating your estimated tax payments, check out the Form 1040-ES estimated tax worksheet or IRS Publication 505.
Should you fail to make your estimated quarterly tax payments or pay too little, the IRS may impose penalties. If you end up making estimated tax payments that are too high you can apply for a refund from the IRS. You will also have the option of applying the overpayment to future tax bills.
Tracking Your Deductible Expenses
There are many reasons for tracking your expenses beyond filing your annual tax return. It can help you with budgeting, forecasting, and financial planning. It will also allow you to predict your future cash flow and make your operations more efficient.
When it comes to filing your taxes, expense tracking can help you keep track of your deductions. These are based on what your business spends on services and equipment. Common 1099 expenses that should be tracked for deductions include:
- Utilities and Supplies
- Costs of goods sold
- Vehicles used for business
- Travel expenses
- Home office deductions
Business deductions decrease the amount of tax you owe by reducing your taxable income. To show how this works, let’s say your income from self-employment was $50,000 for 2020. If you are single and claim no deductible expenses, you will pay $4,315 in federal income tax on that amount. Now, if you claimed $2,500 in business deductions for the year your taxable income would decrease to $47,500 and you would pay $4,015 in income tax. That’s a tax savings of $300.
Your Form 1099 Checklist
If you earned income as an independent contractor and will be reporting your income based on Forms 1099 provided by clients, the following checklist should help reduce the stress of tax season by keeping organized:
- Forms 1099-Must generally be mailed out by businesses by February 1, 2021, so keep an eye out for the forms and keep them with your tax records.
- Check your payment records to ensure that any client that paid you more than $600 sent you a Form 1099. If you did not receive one from a business by mid-February, reach out to the company and ask for one.
- If a business client paid you less than $600 during the 2020 tax year, they are not required to send you a Form 1099. However, you still must pay tax on that income, so carefully review the payments you have received to ensure that you have reported any that were below the reporting threshold.
- If you expect to pay more than $1,000 in taxes in a year, make your quarterly estimated tax payments.
- Carefully track your deductible business expenses to ensure you are claiming the largest possible deduction.
- File your individual Form 1040 by the April 15 due date.
- Be sure to include your Schedule C reporting your net business income or loss and Schedule SE reporting any self-employment tax due with your Form 1040.