Contributed by: TriciaD, FreeTaxUSA Agent
If you receive Form 1099-NEC or 1099-MISC, you may wonder whether you have self-employment income or not. Businesses use Forms 1099-NEC or 1099-MISC to report payments made to individuals who aren’t employees of the business. Each form serves specific purposes.
It’s important to consider both the nature and extent of your work activities, as well as the relationship you have with the person or business paying you. Tax effects will differ depending on the form provided by the payer.
What is Form 1099-NEC?
Businesses utilize Form 1099-NEC to report payments made to non-employees for their contracted services. If you work as a freelancer, rideshare driver, independent contractor, or are self-employed, you might receive this form.
What is Form 1099-MISC?
Form 1099-MISC is issued to individuals that receive at least $600 for miscellaneous business payments not including non-employee compensation. For example, you could receive a 1099-MISC from selling products online. It can also be received for other types of transactions such as rent, prizes, and awards.
There are many kinds of income reported on Form 1099-MISC and most of these types of income aren’t subject to self-employment tax. You'll need to distinguish whether your 1099-MISC income is self-employment income. All income reported on Form 1099-MISC is subject to income tax.
NOTE: The issuer should provide 1099 forms by the 31st of January.
What is considered self-employment income?
Payments you receive for services offered is considered self-employment income even if you don’t have an official business. This payment isn’t considered employee wages because there’s no employer-employee relationship between you and the payer.
When you’re self-employed or work as an independent contractor, you earn income by making agreements with businesses or various entities. Usually, payers don't withhold taxes from your payment(s), so you'll need to take care of your own tax obligations.
If you earned money outside a traditional job working for a business, this is usually considered self-employment income and should be reported on Schedule C of your tax return.
Typically, you have self-employment income if any of the following apply:
- You’re in business as a self-employed individual, like a sole proprietor, independent contractor, or part of a partnership or LLC.
- You’re active in a trade or business with the goal of profits or intentions to make profits.
- You have control over your work schedule and how your work is done, without being under the payer’s supervision or direction.
- You put personal funds, equipment, or other assets into your work.
- You have the potential for having a profit or loss.
- Your services are offered to the public, or to a specific market.
If you don’t meet any of the above criteria, the income may be miscellaneous income, not self-employment income.
Compensation for miscellaneous income, which isn’t self-employment income is usually reported as Other Income on Schedule 1 line 8, and included on Form 1040, line 10.
In the FreeTaxUSA software, follow this menu path:
- Income > 1099-NEC/1099-MISC.
- Enter the information from the form you received.
- Continue entering information as it applies to the income reported on the form.
If the 1099 indicates income from self-employment services, you must link the 1099-NEC to a business, so the income is reported on Schedule C as required. To enter or edit qualifying business expenses, assets, and other necessary details after adding the 1099-NEC follow this menu path: Income > Business Income (Schedule C).
You need to attach the 1099-NEC to the correct business. Follow this menu path: Income > Business Income (Schedule C) > click/tap Edit > Income and Returns. A screen will let you do this. Simply check the box next to the 1099-NEC for the relevant business.
Be sure to visit all required items on the ‘Your Business’ menu page.
Is my 1099-NEC/1099-MISC income subject to self-employment tax?
Clients or payors don’t withhold income tax, social security tax, and Medicare taxes as an employer would. Typically, these taxes are deducted from paychecks and reported on a W-2. This is the reason you’ll get a 1099-NEC instead. Include this income in the total business income reported on Schedule C.
Self-employment income will generally be subject to self-employment tax. Typically, a tax return that includes Schedule C with business profits will also include Schedule SE for self-employment tax.
Income entered in the 1099-NEC and Business Income (Schedule C) sections within FreeTaxUSA will accurately appear on Schedule C. If applicable, Schedule SE will be included for income subject to self-employment tax.
