Do You Have to File a 1099 Under $600? - The Simple Explanation

12

Min Read

Michael Eckstein, EA

Are you self-employed, a 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 You Have to File a 1099 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 IRS. You are required to report any income under $600 whether you receive one in the mail or not and whether your client 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 questions to help you survive tax season this year. 

Why You Have to Report All Income

It is a legal requirement to report all of the money you make from self-employment or your small business to the IRS, whether that is one dollar or one million dollars. 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. These can be monetary penalties or, in severe cases, criminal penalties. If you have reasonable cause (a very tough standard to hit) for not reporting your income, the IRS will let you go. However, if you you understand that you need to report your income and fail to do so, it will be detrimental. 

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. 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.

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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 W2s. They might need 1099s for their side gigs. When filing your taxes, you may need to fill out a 1099 form for the income you received, even if you are an employed worker. 

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-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 self-employed, an independent contractor, or a freelance worker, this would come from a client. Since 2020, 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 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

A 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.

What is the Self Employment Tax Exemption?

If your earnings are less than $600 total for the year, you aren't required to file a tax return. If your net earnings are below $399 for the tax year, you aren't required to file a tax return either.

You will still be required to file this earning. If your company made less than $400 after all of your small business expenses have been subtracted, you will not have to pay the self-employed tax on the amount. 

How to Keep Track of Your Income Throughout the Year

Being your own boss means you are subject to keeping track of your revenue, tax withholdings, and expenses throughout the year and reporting them to the IRS. You must withhold a certain percentage of all self-employment income so that you can pay self-employment taxes. 

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. 

Business 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. From the very start of your business or contract work, keep a detailed log of what you are getting paid, who is paying you, and what they are paying you for. 

Log hours, tips, work completed, and who gave you the money in an Excel spreadsheet or accounting software. Spreadsheets are an excellent way to track both income and expenses for very small businesses with minimal cash inflows or outflows.

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 expenses throughout the year. It includes anything that is ordinary and necessary for the function of the business. These can include equipment, travel and lodging expenses, and more.

To keep track of all of these expenses, take pictures and save all receipts. Many people have a physical folder to hold your paper receipts and a folder in your phone to store screenshots of electronic receipts that were emailed to you.

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. 

Make a spreadsheet with four columns, labeled date, item, cost, and receipt. Make a note of where the receipt is located and use this to track every business expense you have. 

Excel comes with a template for a 1099 tracker to make it very easy. You can also join thousands of other freelancers and sign up for Bonsai Tax & Accounting 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. Again, log any money if it's a payment for work you've done.

Even if you report everything, there are 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. 

As a taxpayer, you do not need to record your personal expenses for tax purposes. It is smart, though, to keep track of your expenses for your own financial needs. 

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 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. 

People commonly confuse this and do not think they need to report their freelance or contractor earnings. If you do not pay taxes on all income, you risk getting audited by the IRS and facing penalties. 

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 accounting software can help keep track of your finances, measure your profits and losses, and provide you with tax estimates. Sign up for a free trial.

FAQs

Here are some additional answers to common questions that come up for this topic:

  1. How to Determine if You Earn Self Employment Income

Follow these bullets to determine whether or not you will be reporting a 1099 on your taxes. 

Freelancer:

  • You do not receive benefits such as health insurance and paid time off by any specific entity
  • You set your schedule and choose your jobs
  • You determine your pay rate and you bill your clients for your work
  • You receive one or more 1099-NEC tax forms each year
  • You are in charge of paying all of the necessary expenses for your business

Employee:

  • Your pay rate is determined by a company other than you
  • You receive health insurance, paid time off, and other benefits
  • You do not choose your schedule, and it is managed by someone else
  • Other people assign work to you
  • You receive one or more W2 tax forms each year
  •  You are not responsible for personally paying the necessary expenses for your business.
  1. How to Find Out How Much You Owe in Income Tax

The amount of taxes that you will owe will depend on a number of different factors. Your income tax bracket will determine how much you will have to pay, along with the amount of money that you made and the number of deductions you were able to write off. 

You will have to pay for different types of taxes. These include your federal income taxes, your state income taxes, your self-employment taxes (Social Security and Medicare taxes), and your local taxes based on your location. 

The self-employment tax rate does not vary depending on your tax bracket or your physical location. It is the same across the country. 

Your self-employment taxes include Social Security and Medicare. They are also called FICA, or Federal Insurance Care Act. You will pay the employee and the business portion of this tax when you file your taxes. The current rate is 15.3%, with 12.4% going to Social Security and 2.9% going to Medicare. 

The Self Employment Tax Exemption is the only exception to having to pay these taxes. 

  1. Penalties For Not Reporting Your Income

If you underpay your taxes by not reporting all of your income, you can receive a 20 percent penalty on them for major accuracy issues. It includes improperly reporting your taxes, ignoring IRS rules, claiming benefits that are false, or failing to disclose assets. Not reporting income from a 1099 falls into this category. 

We hope this helps clear things up. Now, make tax time way easier by signing up for a free trial of Bonsai Tax & Accounting.

Disclaimer: Tax rules frequently change and are highly specific to your situation. Please consult a qualified tax professional.

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