Are you self-employed, a 1099 freelance worker, or an independent contractor? If so, you may be wondering whether or not you need to file a 1099 if you made under $600 in a fiscal year.
Taxes are confusing; it's a fact. Knowing what to report, when to report it, and how to report it properly is not an easy task.
The question, “Do I Have to File a 1099 if Under $600?” is a bit misleading because you don’t necessarily “file a 1099.” Rather, any client who paid you more than $600 needs to send you a 1099, stating how much income they paid to you.
Still confused? The simpler truth is that all of the income you make, no matter how little, has to be reported to the Internal Revenue Service. You are required to report any income under $600 whether you receive one in the mail or not and whether your clientele reports it to the IRS or not.
Below we discuss why you have to report your income. We also cover how to calculate your taxes and other common 1099 questions to help you survive tax season this year.
Why You Have to Report All Income
Whether you are self-employed, unemployed, an independent contractor, or receiving money from a side gig, you need to let the state know about every penny you receive.
The IRS states, "All income earned through the taxpayer's business, as an independent contractor or from informal side jobs is self-employment income, which is fully taxable and must be reported on Form 1040. Independent contractors must report all income as taxable, even if it is less than $600."
If you fail to report your income, it can result in hefty penalties. You should even report cash income. These can be monetary penalties or, in severe cases, criminal penalties.
How to Report Your Income to the IRS
Each year during tax season, you will report your income using a Form 1040 or 1040-SR. Form 1040 is the individual tax return form that everyone files. Business revenue/expenses are reported on an attached Schedule C which is filed as part of Form 1040.
Employees and independent contractors both fill out a Form 1040. The difference is whether or not you are required to record 1099 income or W2 income (sometimes even both in the same year). If you do not know whether your company has hired you as an employee or as a freelance worker, you need to find out.
To report income that you made as a sole proprietor of your business, you will complete a Schedule C.
Note: The IRS no longer has the option of a Schedule C-EZ. They were both for the same thing. Schedule C-EZ required less info and was for certain businesses with under $5000 expenses and no employees
Even if your company has lost money over the year, you should file your taxes because it will lower the amount of taxes you have to pay on your current income, even if it was under $600. If you don't file a 1099, this can result in some serious penalties.
Self Employed Workers and 1099 Forms
A 1099 contractor is any self-employed individual. From an IRS/labor perspective, a 1099 contractor is someone that has control over their work. They set their own hours, use their own tools, and receive money for a good or service. (Employers do not remit taxes for 1099 contractors.)
If a client paid you more than $600 in income during the year, they’ll likely send you a 1099-NEC to attach to your Schedule C. If you didn't receive a 1099-NEC or a different type of 1099 form for the income you received, you'd still report that income but wouldn't file a 1099 on the Schedule C.
Employed workers would receive a W-2. Employers are required to withhold a portion of social security and Medicare taxes from their employee's paychecks, and they must also pay a corresponding amount.
An employee might need 1099s for their side gigs.
There are multiple different kinds of 1099 forms for different types of income. Below we will discuss what they are and when you would need to use them.
Form 1099 MISC
Form 1099-MISC reports different types of miscellaneous income. These include $10 or more in royalties or broker payments, $5000 or more in consumer products that you sold, $600 or more for rent, prizes or awards, or any “other income.” Form 1099-MISC was replaced by the Form 1099-NEC for non-employee compensation.
Form 1099-NEC
Payments received as a 1099 contractor are reported on 1099-NEC. This form is provided to you by an entity or person who is not the employer that gave you money. If you are an independent contractor, or a freelance worker, this would come from a client. Since the 2020 tax year, these payments from clients are now reported on a 1099-NEC instead.
1099 B
This form covers income from the sale of different securities and bartering exchanges. If you sell stocks, bonds, or derivatives, the money you make will be reported to you on a 1099B. You report it to the IRS on Schedule D and Form 8949.
1099-G
A 1099-G covers income from local, state, and federal governments. It includes tax refunds, credits, offsets, unemployment compensation, or other government payments.
1099-LTC
An IRS form 1099-LTC reports long-term care insurance and accelerated payments from a life insurance policy. These include accelerated death benefits.
1099-R
1099-R reports distributions received from IRA, 401(K), retirement plans, pension, and profit-sharing programs.
1099-S
You would receive a form 1099-S if you received proceeds from real estate exchanges or sales.
Remember that even if you do not receive one of these forms for your income, you still have to report it to the IRS. Additionally, if the income on the report is less than $600, you still have to report it to the IRS. Some other common 1099s include 1099INT, 1099DIV, 1099SSA.
Exemption For Your Self Employment Taxes?
Yes, there is an exception for when you don't need to pay self-employment tax. If your earnings are less than $600 total for the tax year, you aren't required to file a tax return. If your net earnings are under $399 for the tax year, you aren't required to file a tax return for your self-employment taxes either.
You will still be required to file this earning. The rule is that if your company made less than $400 in a tax year after all of your small business expenses have been subtracted, you will not have to pay the self-employment tax (Medicare and Social Security) on the amount. Although you still may not receive an information return, but you can still file taxes without a 1099.
How to Keep Track of Your Income Throughout the Year
To get the largest tax break possible and avoid penalties from the IRS, you need to keep detailed records about all business-related income and expenses as you prepare for tax season. Here is a list of ways to keep track of your income throughout the year.
Self-employment Income
Tracking your income will be very different depending on what type of business you own and what kind of work you are doing. The bottom line is that you need to account for every cent you receive from contract work.
For any contract work, self-employment, or other working income in which you are the sole proprietor, accounting software is better than a spreadsheet. You can even use our accounting software Bonsai Tax to automatically track your income and make it easy to share with a tax professional!
Business Expenses
You will want to keep track of all of your business-related expenses throughout the year. Tax deductions can help you lower your taxable income. It includes anything that is ordinary and necessary for the function of the business. These can include equipment, travel and lodging expenses, and more.
If you can take a careful record of all of your business costs throughout the year then you will save yourself a lot of money when you file your tax return and a lot of hassle when tax season rolls around.
Use our free 1099 template Excel for tracking to make it very easy.
You can also join thousands of other freelancers and sign up for our tax receipt organizer to log your income and expenses.
Personal Income
Most people do not think of logging in a notebook every time their grandma sends them birthday money in the mail, however, you legally have to report this to the IRS if grandma gifted you over $14,000 within a year.
Making a quick note of the money friends send you on Venmo or the Christmas check you get from Aunt Becky will make this process extremely easy and painless if you are to get audited.
Even if you report everything, you may be subject to penalties if you mistakenly underpay your taxes. Create a quick spreadsheet for your personal income as well to easily make note of all money you receive.
Final Thoughts
Now you know that even if you do not make enough money to reach the $600 threshold where you likely are sent a 1099, you will still have to report all of your income when you file your taxes. It’s best for taxpayers to document any income from any source so that it’s available to submit when you do your self-employment taxes.
Business owners who pay non-employees more than $600 will be required to report it to the IRS using a 1099-NEC, which is replacing the 1099-MISC. Even if you are paid less than $600 and you do not receive a 1099 form, you are required to report the income. If you earned more than $600 and misplaced your 1099, then you need to contact your client.
Keep a detailed record of all of your income throughout the year. Additionally, save all proof of business-related expenses so that you can write them off on your taxes and pay less in the end. If this sounds like a lot of work to you, you can easily track all of your earnings with Bonsai.
Our easy-to-use free freelancer accounting software can help keep track of your finances, measure your profits and losses, track your deductions and provide you with tax estimates. Sign up for a free trial.
Disclaimer: Tax rules frequently change and are highly specific to your tax return situation. Please consult a qualified tax professional.
