At the end of each year, individuals who have an employment contract with a company get a Form W-2 that summarizes their income and tax withholding. For individuals with self-employment and other non-W-2 income, 1099 forms serve the same purpose.
You’ll report the income shown on your 1099 form when you file your tax return, and in some cases, you’ll have to pay self-employment tax on your earnings. Here’s a look at how 1099 forms work and how you can use them during your tax preparation to determine whether you owe self-employment tax.
A 1099 tax form is a type of information form falling under the same classification as a Form W-2. Types of 1099s include:
- Form 1099-INT, which reports interest payments
- Form 1099-DIV, which reports dividends
- Form 1099-MISC, which reports payments of $10 or more in gross royalties, or $600 or more in rents or compensation, to a business or other non-employee worker, such as a self-employed business person
How Self-Employment Tax Works
Self-employment tax might seem like a punitive tax on taxpayers who run their own businesses, as it’s a 15.3 percent tax on top of federal and state income tax. But self-employment tax actually consists of the Social Security and Medicare taxes that W-2 employees pay. These taxes are mandated by the Federal Insurance Contributions Act.
FICA taxes total 15.3 percent — 12.4 percent in Social Security tax and 2.9 percent in Medicare taxes. This tax is normally split between an employer and an employee, so W-2 employees only pay 7.65 percent in FICA. Self-employed individuals are considered both employers and employees for tax purposes, so they pay the entire 15.3 percent.
Who Must Pay Self-Employment Tax?
You must pay self-employment tax if your net earnings from self-employment are $400 or more or you earned $108.28 or more in church-employee income. Net earnings equal your gross income less any deductions, credits and exemptions you qualify for, including deductions for business expenses that are considered normal or necessary to conduct your trade. In addition, half of your self-employment tax is deductible.
Filing Taxes Self-Employed
Self-employed individuals complete a Form 1040 just like W-2 employees do, but they use Form 1099-MISC instead of Form W-2 for information about their income and withholding. Self-employed workers use two additional forms W-2 employees don’t need:
- Schedule C (Form 1040), Profit or Loss From Business, to figure your net business income
- Schedule SE (Form 1040), to figure out how much self-employment tax you owe
You only pay the Social Security portion of FICA tax on the first $128,400 of your net earnings, but you pay the 2.9 percent Medicare tax on all your net earnings. You’ll owe an additional 0.9 percent Medicare tax if you earn more than $200,000, or $250,000 if you are married and filing jointly.
Quarterly Tax Filing
Because the American tax system is a pay-as-you-go system, self-employed individuals often have to make quarterly estimated-tax payments. You can use the worksheet in Form 1040-ES, Estimated Tax for Individuals, to determine if you need to file quarterly taxes.
Generally, you’ll owe estimated taxes if you expect to owe $1,000 or more when you file your return. But you won’t have to pay estimated taxes if you didn’t owe any taxes in the prior tax year, you were a U.S. citizen or resident for the entire year, and your prior tax year covered a 12-month period. In the event you do have to make estimated payments, you’ll be assessed a penalty if you don’t file them on time, even if you’re ultimately due a refund.
Related: How to Calculate Estimated Taxes
Get Expert Help If You Need It
Self-employed individuals who generate even a small profit generally owe self-employment tax. And in most cases, you’ll need to pay estimated tax in four quarterly installments. Because calculating self-employment tax can get complicated, you might want to consult a tax adviser, especially if this is your first tax filing.