Do I Have To File A 1099 if Under $600? -- No! But You Still Have To Pay Taxes

9

Min Read

Maria Malyk

Taxes are confusing for most people, and who can blame them? The different forms, the multiple calculations, the exemptions, the 1099 deadlines: it is easy for the taxpayer to be overwhelmed, disoriented, and intimidated by all those things, especially when the instructions to filing them are written in unfriendly legalese.

Freelance workers are no exception when it comes to being puzzled by figuring out their income and other taxes, especially since, unlike W-2 workers whose income/social security/Medicaid taxes are withheld from each paycheck, freelancers are expected to calculate and put aside what they owe in 1099 taxes to the Internal Revenue Service on their own.

If you are not sure if/how to report the income you earn as a self-employed entrepreneur to the IRS, read on to see:

  • which taxes you owe
  • how much of your income is taxable (addressing "the $600 rule")
  • which IRS form you need to fill out for which portion of your tax return
  • how to do it all accurately and efficiently with the help of the Bonsai Tax software/app

Which Taxes Do Freelancers, Independent Contractors, And Other Self-Employed Workers Pay?

  • Before we talk about tax forms, let's briefly review the taxes to be paid to the IRS by freelance workers. Independent taxpayers are required to pay income and self-employment tax each tax year.

Income Taxes (Federal + State)

  • Federal Tax: All U.S. American taxpayers are subject to the federal income tax (see here for 2021 tax brackets)
  • State Tax: Either of U.S. States have no state income tax at all, while the rest of the states impose either flat-rate or graduated-rate income taxes on those who work there.
  • Some local governments in several U.S. states also impose additional local/county taxes (those typically go toward local education programs, parks maintenance, community building, etc.)

Self-Employment Tax

There is also a "self-employment tax" to be paid, which is essentially a Social Security/Medicaid tax.

In the tax year 2021, the self-employment tax has been set at 15.3% (12.4% for Social Security and 2.9% for Medicaid taxes).

Keep in mind that, as an independent contractor/freelance worker, you can be exempted from paying self-employment tax if your net earnings are $399 or less per year.

Try our free 1099 self-employment tax calculator to check how much you could owe for the 2021 tax year.

What Is The Timeline For Paying Taxes For The Self-Employed?

U.S. tax system is "pay-as-you-go", which means that, as earnings come in, taxes must be paid on them on an ongoing basis.

For W-2 workers, their tax estimates are already withheld from all the paychecks issued by their employers.

Independent (form 1099) workers, on the other hand, do not typically have taxes automatically withheld from the money that is paid to them by clients -- and it is the freelancer's obligation to pay the legal (federal/state/social security/Medicaid) taxes on all that income.

It would be a nightmare to pay individual taxes on each freelance gig, so the IRS set up a schedule for self-employed workers, whereby they file payments of tax estimates on a quarterly basis, every three months.

Report Any Self-Employment Income You Make (But Not All With The Form 1099 MISC/1099 NEC)

The American taxpayer is required to report all income: from all sources and regardless of whether it's a solitary dollar or a million bucks.

Essentially, to the IRS, an independent contractor is classified as a "1099 income worker": someone who is not an employee of any one organization or enterprise, but a freelance, self-directed entrepreneur who provides specific professional services / complete various assignments for multiple clients.

Being a "form-1099 worker" means that some version of the 1099 IRS form will be involved in the filing of your tax return.

What Are 1099 Forms?

The tax form 1099 is a kind of an "information return" form, issued by the payer to the independent contractor. Any commercial entity that contracts your freelance services is required to issue a 1099-NEC form to you by no later than January 31st of the tax year.

There exist a wide variety of state- and IRS-associated 1099 forms that are used in reporting non-salary-type taxable income. Here are the top/most frequently used ones:

  • Form 1099-NEC: the standard form issued by businesses ("the payer") to independent contractors (as paid non-employees) to declare any non-employee compensation that was over $600 . Gigs that earned less than $600 per year from a client, do not warrant a 1099-NEC -- but the taxpayers still have to report and pay taxes on that income. (Form 1099-NEC replaced form 1099-MISC that was used for miscellaneous income purposes prior to 2020.)
  • Form 1099-INT: issued to taxpayers who earned $10+ worth of interest from banks, brokerage/investment firms, etc.
  • Form 1099-DIV: sent to taxpayers who earned dividend income (for example: corporations make cash payments to their investors as a reward for owning stock/equity shares).
  • Form 1099-S: pertains to real estate transactions, if the taxpayer closed a sale/exchange at any point throughout the year (for example, receiving gains/proceeds from the sale of residential properties, commercial/industrial buildings, land, etc.)
  • Form 1099-B: issued to those who've had transactions requiring a broker, such selling stocks/commodities; certain bartering exchanges are reported on this form.
  • Form 1099-G: sent to taxpayers who collected money from federal/state/local government (e.g. unemployment benefits).
  • Form 1099-R: issued to those who received a payout from a retirement plan/pension/IRA, etc. (not all retirement distributions are taxable, however!)
  • Form 1099-MISC: issued for miscellaneous income that falls outside of all the other 1099 forms. Money made from prizes and awards, for example, is reported on the 1099-MISC form.  

As a freelancer, you are likely to receive a 1099-NEC form (prior to year 2020, it would have been form 1099-MISC) from each business that contracted your services that resulted in a payment of $600 or more during the tax year.  

Likewise, if you contracted the services of other independent workers to help run your business, which resulted in paying them $600+, you are expected to issue a 1099-NEC form to each of them by January 31st.

Alas, not being issued the form 1099 from a client does not legally absolve the taxpayer from having to report/pay taxes on that income with the IRS. (If you wish to simplify and optimize keeping track of / filing your taxes, bring the Bonsai Tax app onboard your business!)

The $600 Rule

As mentioned, there exists a $600 threshold for whether self-employed income is reported on a 1099 form or not.

To be clear, the $600 rule is a bureaucratic distinction -- it does not mean that lower-than-$600 income is not taxed!

If a freelancer made less than $600 from a contract/gig with a client, they must keep track of that income and pay quarterly estimates as well as end-of-year taxes on them, just like any income over $600 (If that sounds like a lot of work, consider letting Bonsai Tax app help you estimate quarterly payments and file your tax return!)

Forms Needed To Report Self-Employed Income

The standard tax return form most taxpayers file is form 1040. Self-employed tax filers additionally fill out form Schedule C.

Schedule C functions as a hub for all freelance income and expenses. Schedule C is used to report "income or loss" from a profession you practice as a sole proprietor. Technically, any activity can be qualified as a "business", provided that:

  • You engage in this activity with the primary goal of earning income/profit.
  • You are involved in this activity on an ongoing, regular basis.

Keep in mind that the best evidence of income and business expenses is a complete set of original receipts of all the relevant transactions, so make sure to hold on to/archive those throughout the year. (Use our cloud-based Bonsai Tax receipt organizer/expense tracker to help you and save on time, effort, and stress!)

Noncompliance With The Internal Revenue Service Is Unadvisable

Unless you've resigned yourself to never doing legitimate business/earning legitimate income in the U.S., you should take care not to burn bridges with the Internal Revenue Service.

The Internal Revenue Service does not just "not like" incomplete or late payments, they impose penalties for these infractions and shake you down for the full amount of what is now considered a "debt" with interest!! They can issue large penalties for not filing 1099 forms.

If income is intentionally under-reported or kept secret by the taxpayer, the IRS can bring them up on tax fraud charges, the more severe of which may come with an actual jail sentence for "purposeful evasion".

However, even though you can't get out of paying income taxes, what you can do is reduce the net earnings to be taxed -- by collecting and deducting all your business expense receipts!  

A Firm Grip On Taxes Brings Profit To Your Business And A Peace Of Mind To You

Doing taxes is a daunting experience best handled with professional help. That help can come in the form of hiring an accountant, which is the recommended route.

However, accountants can be pricey. Luckily, the next best thing -- the Bonsai freelancer accounting app -- is super helpful and affordable!

The Utility Of The Bonsai Tax Software

If you bring Bonsai Tax abroad your business, much of the sorting of materials, the calculating of numbers, and the filling of quarterly estimates, as well as tax returns at the end of the tax year, will be taken over by smart software designed for this very set of tasks.

The Bonsai Tax app will:

  • record your income on an ongoing basis
  • import credit card and bank statements automatically
  • scan, organize, and track expense receipts for taxes and sort them into appropriate deductible categories (so that you pay less in taxes!)
  • generate expense reports (so that you always know how your budgeting is going)
  • generate quarterly tax estimates (so that you know how much you owe every quarter and at the end of the tax year)
  • fill out all the digital "paperwork" of the tax return on the basis of all the previously-enrolled data, when you are filing for the tax year
  • keep all your tax materials/records/forms safely filed away in a cloud-based online account (so you can dump all those messy paper receipts into the recycling bin and be clutter-free)

In other words: Bonsai Tax will help you keep track, maintain control over, be on-time with the payments to the IRS, and ensure that those payments are accurate and won't get you fined or audited. In other words, the app will make filing taxes as a freelancer a cinch.

And it even has an advantage over a human accountant -- it doesn't sleep! Bonsai Tax software/app is always at your fingertips (from computer or phone), letting you access your account on your own time, anytime. Test drive our software for 14 days by clicking here.

The Peace of Mind Of The Bonsai Tax Software

As you employ the smart assistance of the Bonsai Tax app, you will find that not only does it have tremendous practical utility, it also comes with the sense of satisfaction and relief in knowing that your finances are in order, updated, and stored in a safe and secure digital environment.  

With Bonsai Tax on board, you can focus on doing your best work for your clients, knowing that your business book-keeping is in good hands.

Maria Malyk
Maria is a freelance copywriter and language translator, with a PhD in sociology of culture and cognition and a background in academic, legal and financial writing. A digital nomad, Maria also keeps a travel blog while working on a guidebook for solo travelers on a budget.

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