Do You Have to File 1099 Taxes If You Were Paid Under 600 Dollars?
This is often interpreted the wrong way by many new freelancers and small business owners. If you are a freelancer, independent contractor or self employed, you might have heard that your clients don’t have to report your 1099 income if it’s under 600 dollars on your tax return. They often assume that since their client doesn’t have to report a 1099, then they don’t have to report their income to the United States Internal Revenue Service.
Another similar false belief is that if you don’t get a 1099 in the mail, then you don’t have to report that income on your taxes if you don’t receive a form. The truth is, all taxpayers are required to report all income they make throughout the year. It doesn’t matter if you made one million or one dollar the IRS requires that they get their cut. You may be wondering how to calculate your self employment taxes, even if it’s under 600. I am going to get rid of all your false beliefs and give you a game plan to calculate your taxes owed so you can come clean with the IRS.
How to Report 1099 Earnings Under $600
It can be tempting to keep some of your income a secret from the IRS, especially if part of it was cash for a small If you make tips, you may be wondering if you have to report your cash tips. The IRS may not be watching you at this very moment, so you feel tempted to keep your hard earned money.
Just know that you are opening up yourself to a world of pain if you get audited by the IRS. They will question every single deposit into your account and then impose penalties on the taxes you didn’t pay. Before we can get into the nitty gritty of reporting your less than $600 income, you must understand the potential IRS penalties for not filing before you get any funny ideas.
What are the Penalties for Not Reporting Income Even if it's Under $600?
If you make money outside of a regular employee situation, then you need to document every dime of your income and expenses throughout the tax year and be prepared to report them to the IRS.
If the IRS finds income that you were supposed to file taxes on but didn’t, then you will owe interest on that amount. The interest starts occurring from the moment the payment due date is missed. Just because the IRS doesn’t catch your mistake now doesn’t mean they won’t catch it later. Doesn’t matter if they find the deposit from years ago, that just means that you will owe interest for years on nonpayment. The interest starts building up from the missed due date, not the date that they caught you. This could result in an enormous tax bill.
Your effort to save money could end up in you losing more than you made in the first place. Not to mention that your negligence could be viewed as tax fraud, which might require you to go to jail over an IRS audit.
The bottom line is, If you don’t receive a 1099, you may still owe the IRS. Don’t make the mistake of thinking you don’t. Now that we have your head on straight, let’s go over how to calculate your taxes owed.
How to Calculate Your 1099 Taxes Owed
There are 4 main types of taxes that you usually have to pay:
- Federal income tax
- State tax
- Self employment income, medicare and social security taxes
- Local or county taxes depending on your location
The amount of reportable income taxes you pay depends heavily on your income tax bracket, how much you make and the amount of business write offs you have. The IRS is also providing tax inflation adjustments for this next tax year. This may change your income tax bracket.
The only tax rate that doesn’t vary depending on your tax bracket or location is the self employment tax.
Self employment taxes are also known as the Federal Insurance Care Act (FICA), which consists of Social Security and Medicare. As a self employed individual, you will owe both the employee and business portion of this tax, which is 15.3% at the time of writing this article.
The majority of the full 15.3% goes to Social Security which is 12.4% and the last 2.9% goes to Medicare.
Figuring out how taxes you owe can be confusing. The best way to ensure that you don’t over or underpay is to use a self employed tax calculator.
In most cases, you have to pay self employment taxes, however there is one major exception to this rule that could save you a chunk of change.
Self Employment Tax Exemption
If your net earnings are below $399 for the tax year, then you don’t have to pay self employment taxes on that. That means that if your profit after qualified business expenses is below $399 during the calendar year, then you don't have to pay self employment taxes. To be clear, you always have to file your taxes, but you might not have to pay the self employed tax on this amount.
So if you bought a laptop, had some meals with clients or qualified for the home office deduction, then your net earnings go down. With most things in life, there is a catch. If you want to take advantage of tax deductions, then you must keep a detailed record of all your business expenses.
Keep a Detailed Record of Business Expenses & Income
You are not guaranteed to get a 1099 from your client, but you will still have to keep track of your own income and expenses so you can protect yourself from audits. Make sure you have a proper accounting system in place so that there is no confusion if the IRS auditor comes knocking.
Document every dime you make and spend as a freelancer, small business owner or independent contractor. Your future self will thank you. You can do this by getting a separate business bank account or credit card. If you don't want to pay for a separate business bank account, then you can use an online expense tracking app that automates this step for you. Now that you have your business expenses accounted for, you must report them using a Schedule C.
Report Using A Schedule C or Schedule C-EZ
To report your income made as a freelancer or independent contractor, you will have to complete a Schedule C or a Schedule C-EZ with your regular 1040 return. The Schedule C-EZ stands for Net Profit from Business while the regular Schedule-C stands for Profit and Loss from Business.
If you made some income from your business and didn’t have any qualified 1099 business tax deductions, then you best file a Schedule C-EZ. This filing form is simpler than the regular Schedule C because you use it to only report income, not expenses. Many people think this IRS form doesn’t apply to them because “they are not a business” but the IRS automatically classifies one person businesses as sole proprietors unless the individual files for a different business license.
If you had qualified business expenses, even just a few, your best decision would be to file a Schedule C with your regular annual income tax return. Along with annual taxes, many business owners have to file quarterly taxes.
Don’t worry though, if you made less than $600 in earnings for the calendar year then you don’t have to file quarterly taxes. You just have to file a Schedule C with your annual federal tax return that is due on April 15th. *Please note that this day is subject to change next year due to COVID.
You should file your taxes even if you operated at a loss, because that will lower your tax bill on your current business income. If you don’t report your business expenses or losses, then you will owe taxes on all the income your business made even if it was less than $600.
The Bottom Line
Business owners who pay nonemployees over $600 are required to file a 1099-NEC on behalf of the freelancer to the IRS. The 1099-NEC Nonemployee Compensation is replacing the tax Form 1099-MISC Miscellaneous Income for self employed people starting the tax year 2020.
The $600 rule often gives payees the wrong impression that they don’t have to report their own 1099 earnings if they make less than 600$. This is a common misconception for many beginner freelancers or independent contractors that can get you into a lot of trouble with the IRS.
This rule is for companies and payors who hire nonemployees only. If you are an independent contractor you are required to pay the IRS on all the taxable income you make regardless of the amount or else you will incur penalties.
To lower your tax bill, you must keep a detailed record of all your qualified 1099 business expenses.
For the best results, use an automated 1099 expense tracking software for all your business write offs so you can save as much of your hard earned cash as possible and protect yourself against audits.