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1099-MISC, Independent Contractors, and Self-employed

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I received a Form 1099-MISC instead of a Form W-2. I'm not self-employed, I do not have a business. How do I report this income?

If payment for services you provided is listed in box 7 of Form 1099-MISC, you are being treated as a self-employed worker, also referred to as an independent contractor. You do not necessarily have to "have a business," but simply perform services as a nonemployee to have your compensation treated this way. The payer has determined that an employer-employee relationship does not exist in your case. That determination is complex, but is essentially made by examining the right to control how, when, and where you perform those services. It is not based on how you are paid, how often you are paid, nor whether you work part-time or full-time. There is no statutory definition of an employee, but from common law three basic areas have been identified:

  • behavioral control,
  • financial control, and
  • type of relationship.

For more information on employer-employee relationships, refer to Chapter 2 of Publication 15-A (PDF), Employer's Supplemental Tax Guide. If you think that you were, or are, an employee and you would like the IRS to issue a determination, you may submit Form SS-8 (PDF), Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Unless you have requested a determination by filing Form SS-8, you generally have to report your nonemployee compensation on Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship), or Form 1040, Schedule C-EZ (PDF), Net Profit from Business. You also need to complete Form 1040, Schedule SE (PDF), Self-Employment Tax, and pay self-employment tax on your net earnings from self-employment, if you had net earnings from self-employment of $400 or more. This is the manner by which self-employed persons pay into the social security and Medicare trust funds. Employees pay these payroll taxes, as well as income tax withholding, through deductions from their paychecks. Generally, there are no tax withholdings on this income. Thus, you may have been subject to the requirement to make quarterly estimated tax payments. If you did not make estimated tax payments, you may be charged an underpayment of estimated tax penalty.

References:

I thought I was an employee and thought my employer was withholding tax from my pay. My former employer sent me a Form 1099-MISC and didn't withhold any taxes. Is there a procedure to have the situation reviewed and possibly make the former employer pay the taxes due? What can I do?

You can ask the IRS to make a determination as to whether an employer-employee relationship exists by filing Form SS-8 (PDF), Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding. If the IRS finds that an employer incorrectly treated an employee as a nonemployee, the employer will be liable for the social security and Medicare tax withholding that he or she failed to withhold and pay. (There are some exceptions to this noted in Publication 15-A (PDF), Employer's Supplemental Tax Guide.)

Holding the employer liable for the tax that was not withheld does not relieve you from the liability for your share of social security and Medicare taxes. To pay your portion, attach Form 4137 (PDF), Social Security and Medicare Tax on Unreported Tip Income, to your individual income tax return and report the employee share of social security and Medicare on page 2 of Form 1040. Cross out the word "Tip" and insert the word "Wages" at the top of the Form 4137 and also at the top of Schedule U, U.S. Schedule of Unreported Tip Income, which is attached to the bottom of Form 4137. Also notate on the Form 4137 that a Form SS-8 has been filed. You may call us at 1 800-829-1040, the toll-free information number if further clarification of the procedure is necessary.

References:

  • Publication 15 (PDF), Circular E, Employer's Tax Guide
  • Publication 15-A (PDF), Employer's Supplemental Tax Guide
  • Form 4137 (PDF), Social Security and Medicare Tax on Unreported Tip Income
  • Form SS-8 (PDF), Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding
  • Tax Topic 762, Independent contractor vs. employee

The instructions for Form 1099-MISC, Box 7, say if you are not self-employed, call the IRS for information about how to report any social security and Medicare taxes. I need to know how do I report social security and Medicare taxes if I received income reported on a Form 1099-MISC, but was not self-employed?

You need to use Form 4137 (PDF), Social Security and Medicare Tax on Unreported Tip Income. Cross out the word "Tip" and insert the word "Wages" at the top of the form and also at the top of Schedule U, which is attached to the bottom of the form. Follow the instructions on Form 4137 to compute your share of your social security and Medicare taxes. Attach Form 4137 to your Form 1040. You may call us at 1 800-829-0922 if further clarification of the procedures is necessary.

You may want to file Form SS-8 (PDF), Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding. This form requests the IRS to make an official determination of whether or not you were an employee. To make this determination, the IRS will need information from you and your employer.

References:

  • Form 4137 (PDF), Social Security and Medicare Tax on Unreported Tip Income
  • Form SS-8 (PDF), Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding

I am self-employed. How do I report my income and how do I pay Medicare and social security taxes?

You are a sole proprietor if you are the sole owner of a business that is not a corporation. Report your income and expenses from your sole proprietorship on Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship), or on Form 1040, Schedule C-EZ (PDF), Net Profit from Business.

If the total of your net profit from all businesses is $400 or more, you must pay into the Social Security system by filing Form 1040, Schedule SE (PDF), Self-Employment Tax. For more information on this, refer to Publication 533 (PDF), Self-Employment Tax.

The Federal tax system is based on a pay-as-you-go plan. Tax is generally withheld from your wages or salary before you get it. However, tax is generally not withheld from self-employment income. Thus, you may be required to make estimated tax payments. Publication 505 (PDF), Tax Withholding and Estimated Tax, provides information on making estimated tax payments.

References:

My son is a newspaper carrier. I would like to know if this income is subject to social security tax and if I must file a Schedule C for him?

Your son may be liable to pay into the Social Security system by paying self-employment tax. However, if your son is under the age of 18 he exempt from self-employment tax. Persons engaged in the trade or business of delivering or distributing newspapers or shopping news (including any services directly related to such delivery or distribution) are considered by statute as nonemployees and are treated as self-employed for all Federal tax purposes, including income and employment taxes.

Independent contractors report their income on Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship), or you may qualify to use Form 1040, Schedule C-EZ (PDF), Net Profit from Business. See Form 1040, Schedule SE (PDF), Self-Employment Tax, which must be filed if net earnings from self-employment are $400 or more. If your child is a newspaper carrier under the age of 18, he is exempted from self-employment tax. See Publication 533 (PDF), Self-Employment Tax. This form is used to figure your social security and Medicare tax which is based on your self-employment income.

References:

I received a Form 1099-MISC with an amount in box 7, (nonemployee compensation). What forms and schedules should be used to report income earned as an independent contractor?

Independent contractors report their income on Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship), or you may qualify to use Form 1040, Schedule C-EZ (PDF), Net Profit from Business (Sole Proprietorship). You should also be aware of Form 1040, Schedule SE (PDF), Self-Employment Tax, which must be filed if net earnings from self-employment are $400 or more. This form is used to figure your social security and Medicare tax which is based on your net self-employment income. You may also need to file Form 2210, Underpayment of Estimated Tax by Individuals, Estate & Trust, if you do not make estimate tax payments.

References:

What, if any, quarterly forms must I file to report income as an independent contractor?

There are no quarterly income reporting requirements for Federal income tax purposes. However, because you will have no withholding taken from your income, you may need to make quarterly estimated tax payments. You use Form 1040ES (PDF), Estimated Tax for Individuals.

You need to be aware that there may be state and local requirements for estimated tax payments. You can start looking for information at How to Contact Us. You may want to go to your state's individual Web site for additional information. To access the state you need go to our Alphabetical State Index.

References:

I made several thousand dollars moonlighting as an independent contractor. What taxes do I need to pay?

You are responsible for Federal income tax and self-employment taxes on your income as an independent contractor. Self-employment taxes are your contributions to Social Security and Medicare. Your self-employment income and expenses will be reported on Form 1040, Schedule C (PDF), Profit or Loss from Business, or you may qualify to use Form 1040, Schedule C-EZ (PDF), Net Profit from Business. You will also need to use Form 1040, Schedule SE (PDF), Self-Employment Tax, to compute and report your social security and Medicare tax, if you had net earnings from self-employment of $400 or more. Since there is no withholding on your self-employment income, you may need to make quarterly estimated tax payments. This is done using a Form 1040ES (PDF), Estimated Tax for Individuals.

References:

12.2 Small Business/Self-Employed/Other Business: Form 1099-MISC & Independent Contractors
I received a Form 1099-MISC from a company that paid all workers this way. Will my income go on line 21 of Form 1040 as Other Income or on Schedule C?

If your income was reported to you on a Form 1099-MISC, in box 7, the company has treated you as an independent contractor and your income is treated as self-employment income. You will need to report that income, and any related expenses, on Form 1040, Schedule C (PDF), Profit or Loss from Business, or you may qualify to use Form 1040, Schedule C-EZ (PDF), Net Profit from Business. You will also need to use Form 1040, Schedule SE (PDF), Self-Employment Tax to compute and report your social security and Medicare tax. You may also need to make quarterly estimated tax payments. You would use Form 1040ES (PDF), Estimated Tax for Individuals, for this.

References:

What is the difference between a Form W-2 and a Form 1099-MISC?

Both of these forms are called information returns. The Form W-2 is used by employers to report wages, tips and other compensation paid to an employee. The form also reports the employee's income tax and Social Security taxes withheld and any advanced earned income credit payments. The Form W-2 is provided by the employer to the employee and the Social Security Administration. A Form 1099-MISC is used to report payments made in the course of a trade or business to another person or business who is not an employee. The form is required among other things, when payments of $10 or more in gross royalties or $600 or more in rents or services are paid. The form is provided by the payor to the IRS and the person or business that received the payment.

References:

How do you determine if a person is an employee or an independent contractor?

The distinction between whether a worker is an employee or an independent contractor has important tax consequences. Worker classification affects how you pay your Federal income tax, social security and Medicare taxes, and how you file your tax return. The classification also affects your eligibility for employee benefits. Those who should be classified as employees, but aren't, may lose out on workers' compensation, unemployment benefits, and, in many cases, group insurance (including life and health), and retirement benefits.

Certain workers are considered employees by statute for purposes of the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), or for federal income tax withholding from wages. Examples of workers considered employees by statute include corporate officers, certain agent, or commision-drivers, full-time life insurance sales persons, certain home workers, certain traveling of city sales persons.

Where there is no controlling statute, a worker's status is determined by applying the common law test, which applies for purposes of FICA, FUTA, Federal income tax withholding, and the Railroad Retirement Tax Act. A worker's status under the common law test is determined by applying relevant facts that fall into three main categories: behavioral control, financial control, and the type of relationship itself. In each case, it is very important to consider all the facts - no single fact provides the answer.

BEHAVIORAL CONTROL: These facts show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done -- as long as the employer has the right to direct and control the work. For example:

  • Instructions -- if you receive extensive instructions on how work is to be done, this suggests that you may be an employee. Instructions can cover a wide range of topics, for example: how, when, or where to do the work, what tools or equipment to use, what assistants to hire to help with the work, and where to purchase supplies and services. If you receive less extensive instructions about what should be done, but not how it should be done, you may be an independent contractor. For instance, instructions about time and place may be less important than directions on how the work is performed.
  • Training -- if the business provides you with training about required procedures and methods, this suggests that the business wants the work done in a certain way, and you may be an employee.

FINANCIAL CONTROL: These facts show whether there is a right to direct or control the business part of the work. For example:

  • Significant Investment -- if you have a significant investment in your work, you may be an independent contractor. While there is no precise dollar test, the investment must have substance. However, a significant investment is not necessary to be an independent contractor.
  • Expenses -- if you are not reimbursed for some or all business expenses, then you may be an independent contractor, especially if your unreimbursed business expenses are high.
  • Opportunity for Profit or Loss -- if you can realize a profit or incur a loss, this suggests that you are in business for yourself and that you may be an independent contractor.

RELATIONSHIP OF THE PARTIES: These are facts that illustrate how the business and the worker perceive their relationship. For example:

  • Employee Benefits -- if you receive benefits, this is an indication that you are an employee. If you do not receive benefits, however, you could be either an employee or an independent contractor.
  • Written Contracts -- a written contract may show what both you and the business intend. This may be very significant if it is difficult, if not impossible, to determine status based on other facts.

If you are not sure whether you are an independent contractor or an employee, complete Form SS-8 (PDF), Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Publication 1779 (PDF), Employee Independent Contractor Brochure, and Publication 15-A (PDF), Employer's Supplemental Tax Guide, provide additional information on independent contractor or employee status.

For information on the tax responsibilities of self-employed persons, refer to Publication 505 (PDF), Tax Withholding and Estimated Tax, and Publication 533 (PDF), Self-Employment Tax.

References:

  • Publication 15-A (PDF), Employer's Supplemental Tax Guide
  • Publication 505 (PDF), Tax Withholding and Estimated Tax
  • Publication 533 (PDF), Self-Employment Tax
  • Publication 1779, Employee Independent Contractor Brochure
  • Form SS-8 (PDF), Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding
  • Tax Topic 762, Independent contractor vs. employee

I work as an independent contractor, but I do not own a business and do not perform services in the name of a business. Can I file my tax return without filing Schedule C or Schedule SE?

The income you earn as an independent contractor generally will be considered income from self-employment and you will need to file Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship), or you may qualify to use Form 1040, Schedule C-EZ (PDF), Net Profit from Business. You will also need to use Form 1040, Schedule SE (PDF), Self-Employment Tax, if you had net earnings from self-employment of $400 or more. Since there is no withholding on your self-employment income, you may need to make quarterly estimated tax payments. This is done using a Form 1040ES (PDF), Estimated Tax for Individuals.

References:

I made several thousand dollars moonlighting as an independent contractor. What taxes do I need to pay?

You are responsible for Federal income tax and self-employment taxes on your income as an independent contractor. Self-employment taxes are your contributions to social security and Medicare. Your self-employment income and expenses will be reported on Form 1040, Schedule C (PDF) , Profit or Loss from Business, or you may qualify to use Form 1040, Schedule C-EZ (PDF), Net Profit from Business. You will use Form 1040, Schedule SE (PDF), Self-Employment Tax, to compute and report your social security and Medicare tax. Since there is no withholding on your self-employment income, you may need to make quarterly estimated tax payments. This is done using a Form 1040ES (PDF), Estimated Tax for Individuals.

References:

In addition to my regular job, I had a part-time business fixing cars. Do I have to report the money I made fixing cars?

Yes. This is self-employment income. You must report it on Form 1040 Schedule C (PDF), Profit or Loss from Business or Form 1040,Form 1040 Schedule C-EZ (PDF) Net Profit from Business. You may also have to file Form 1040 Schedule SE (PDF) and pay Self-Employment Tax. For more information, refer to Tax Topic 554, or Publication 533 (PDF), Self-Employment Tax. Since there is no withholding on your Self-Employment Income, you may need to make quarterly Estimated Tax Payments. This is done using a Form 1040ES (PDF) Estimated Tax for Individuals.

References:

I did some carpentry work in exchange for dental services. Do I report this on my federal tax return?

Bartering occurs when you exchange goods or services without money exchanging. The goods or services exchanged have a dollar or fair market value, and this value must be included in the income of both parties. For further information, refer to Tax Topic 420, Bartering Income.

References:

I made some money repairing radios and television sets last year. How do I report this income?

A person with income from Self-Employment files Form 1040, Schedule C (PDF), Profit or Loss from Business, or in some cases, files Form 1040, Schedule C-EZ (PDF), Net Profit from Business to report the profit or loss from the business, and files Form 1040, Schedule SE (PDF), Self-Employment Tax to figure Social Security and Medicare Tax. Refer to Tax Topic 407, Business Income, Publication 533 (PDF), Self-Employment Tax, and Publication 334 (PDF), Tax Guide for Small Business, for additional information. Since there is no withholding on your self-employment income, you may need to make quarterly estimated tax payments. This is done using a Form 1040ES (PDF), Estimated Tax for Individuals.

References:

What forms and schedules should be used to report income earned as an independent contractor?

Independent contractor report their income on Form 1040, Schedule C (PDF), Profit or Loss from Business, or they may qualify to use Form 1040, Schedule C-EZ (PDF), Net Profit from Business. Independent contractors should also be aware of Form 1040, Schedule SE (PDF), Self-Employment Tax. This form is used to figure social security and Medicare tax which is based on self-employment income. Also, see Form 1040ES (PDF) Estimated Tax For Individuals, as you may need to make quarterly estimated tax payments.

References:

What, if any, quarterly forms must I file to report income as an independent contractor?

There are no quarterly income reporting requirements for Federal income tax purposes. However, because you will have no Federal Income Tax withheld from your income, you may need to make quarterly estimated tax payments. You use Form 1040ES (PDF), Estimated Tax for Individuals, for this purpose.

You may be subject to a penalty for underpaying your estimated tax installments. For more information refer to Publication 505 (PDF), Tax Withholding and Estimated Tax. You need to be aware that there may also be state and local quarterly reporting requirements. You can start looking for information at How to Contact Us. You may want to go to your state's individual web site for additional information. To access the state you need to direct your question to, please go to our Alphabetical State Index.

References:

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