If you earn money as an independent contractor or freelancer, you probably have heard that your clients don’t have to send you a Form 1099-MISC unless you earn $600 or more. This rule can make things a little confusing for the taxpayer, though, since logic can easily lead you to conclude that you don’t have to file taxes if you don’t receive a form. But the $600 rule is for payers only, which means that whether you earned $1 or $20,000, it’s on you to pay taxes on any income you earn.
Taxpayers are required to report all income they make throughout the tax year, regardless of the amount or whether they receive a form for it.
Reporting Earnings Under $600
Sure, it can be tempting to let that $100 your neighbor paid you for fixing his computer go unreported. After all, the IRS isn’t exactly watching you. However, if you’re ever audited, the IRS will go through your bank accounts and question every deposit. Any reported income will be taxed with interest and penalties, which means you would have been far better off claiming it the first time around. If you’re earning side money on the regular, this can be especially dangerous, since your habit of neglecting to pay taxes could be seen as tax fraud, with penalties including hefty fines and jail time.
Although the Form 1099-MISC certainly makes things easier, you can’t count on it, even if you earned well over $600 throughout the year. Although the payer should send a form, the IRS is most concerned about the taxes you need to pay on the money you earned. This means if you make money outside of a payrolled employee situation, you should document every dime of it throughout the year and be prepared to submit it to the IRS at tax time.
Self-Employment Tax Exceptions
It’s important to note that just because you have to report your self-employment income, that doesn’t necessarily mean you have to pay self-employment taxes on the money you earned. You’re only required to pay self-employment taxes if your net earnings exceed $399 during the tax year. That amount is after you’ve taken any trade-related deductions, so that money you spent on a new laptop to support your side gig could be the very thing that keeps you from paying self-employment taxes.
2018 Taxes and Pass-Through Deductions
One of the biggest changes for freelancers in 2018 is the pass-through deduction, which lets you take 20 percent off your taxable income. If you earn $50,000 as a freelancer during the tax year, you can subtract $10,000 from that total and pay self-employment taxes on only $40,000 of those earnings. The change is designed to encourage small business hiring, but it also benefits sole proprietors.
Claiming Income on 2017 Taxes
If you’re still filing your 2017 taxes, you’ll need to report your income on Form 1040, where you’ll detail all wages, salaries and tips for the year. You may be eligible to complete the much more simplified version, Schedule C-EZ, assuming your business expenses for the year were less than $5,000.
- tax forms image by Chad McDermott from Fotolia.com