Filing taxes can be confusing for self-employed individuals and contractors because they don’t have access to the ease of corporate filing.
Since a salaried individual has the benefit of their employer withholding taxes from their monthly salary, their tax filing process is simpler and more straightforward. But this is not the case for independent workers and sole proprietors.
If you are a creative worker, small business owner, or freelancer, it's likely that your income varies over the year and may come from different sources. As a result, your tax calculation can get quite complicated.
Luckily, a self-employed tax calculator can help you anticipate your 1099 taxes for 2021 and plan your finances accordingly. But first, let's understand what Form 1099-Misc is.
Form 1099-Misc is a series of documents that covers information returns. The Internal Revenue Service (IRS) uses these forms to get a report on various types of income you receive, apart from the fixed salary that your employer provides.
You will find several types of 1099 forms for different avenues, such as a small-scale business, freelancing, creative services, independent contracts, and other types of self-employment.
Any income that does not fall under a W-2 form would show up on Form 1099-Misc. According to the IRS, the 1099 form must be filed for each person paid throughout the year in the following ways:
1. At least $10 in royalties or broker payments in lieu of tax-exempt interest or dividends
2. At least $600 in:
- Prizes or awards
- Medical or health care expenses
- Other income avenues
- Crop insurance proceeds
- Cash payments for any fishing boat and fish or aquatic life bought from professional fish-catchers
- Cash from notional principal contract to an individual, partnership, or estate
- Attorney payments
If you have made direct sales of consumer products amounting to more than $5,000 to a buyer for resale anywhere other than a retail store, you can report it in Form 1099-Misc.
When you are estimating your self-employment taxes, note that all your additional or independent income needs to be reported accurately to the IRS to avoid penalties or an audit. This includes bank interests, investment dividends, and freelance compensations.
Moreover, your employer or anyone who issues 1099 forms must send one copy to the IRS and one to you, i.e., the recipient of these payments. This lets the IRS know that your employer has not withheld any taxes from your paycheck.
You may not be aware of your tax burdens from self-employment. That is why filing Form 1099-Misc seems like such a tough task. However, it's simple once you know the specifics, which we’ll tell you here.
The self-employment tax total is 15.3% of your net annual profit or loss from your business. But this rate has two divisions:
- Social security tax (12.4% of the total)
- Healthcare/ Medicare tax (2.9% of the total)
Your business taxes can be a combination of income, expenses, credits, deductibles, and other adjustments. By factoring in all of these, you will be able to calculate your net earnings for the year.
If you are a self-employed individual, remember that you are generally required to file annual tax returns and estimated taxes quarterly. Otherwise, you could attract a penalty of 5% of your tax balance per month, up to 25% of the total owed tax.
On top of that, if you deliberately avoid paying 1099 taxes, you may have to face a penalty of up to 15% per month, up to 75% of the total owed tax amount.
Unlike many other tax types, the self-employment tax does not depend on your income bracket. Therefore, the amount is even for everyone who is self-employed or a freelancer. However, you can reduce this amount by listing deductions and planning wisely.
That's right! You can cut down your tax bill by filing deductibles. Some of these expenses include car maintenance and gas, home office setup costs, and software requirements for your business.
By keeping track of all eligible expenses throughout the year, you can reduce hundreds and even thousands of dollars on your final bill. If you want to completely avoid paying 1099 taxes, you can declare your business a corporation and file accordingly.
To include tax deductions in the 1099 tax calculator, simply subtract the annual business expenses from the total sum in the 1099 income input field. Note that the income refers to the net profit or loss in your business.
It's easy to miss out on a few deductions when you are doing taxes on your own - no matter how careful you are. That's why you can benefit from a professional bookkeeping and tax filing service like Fincent to maximize your savings.
Calculating 1099 taxes is fairly simple if you are aware of the basics. As said earlier, your self-employment taxes include 12.4% for social security plus 2.9% in healthcare.
In 2020, the social security portion of this tax included the first $137,000 of your total earnings. But this sum has changed in 2021. Now, the first $142,800 of your earnings is subject to the social security tax.
Moreover, you might have to pay an additional 0.9% for Medicare if your self-employment earnings are higher than $200,000 for a single tax filer and $250,000 for a joint filing.
Once these details are clear, calculating 1099 taxes is a piece of cake. Here are the steps to get a correct estimate of your total self-employment tax:
- Find out the net earnings of your self-employment or small business. For tax purposes, your net earnings are calculated by subtracting your business expenses amount from the total gross income from self-employment.
- In general, 92.35% of your net earnings from self-employment are subject to the self-employment tax.
- After determining how much of your net earnings are subject to tax, you need to apply the 15.3% tax rate to the amount according to the divisions.
- In case you faced a loss this year or your net income was very little, you can explore two optional methods in IRS Schedule SE to calculate your net earnings and file taxes accordingly.
However, if this feels too confusing for you, you can opt for the free tax calculator to understand how much you need to set aside this tax season.
Yes, if your income is without withholdings or from various sources, you need to look into filing quarterly estimated tax payments. This is crucial if you are dependent on contracts, freelance work, or other self-employment avenues for your income.
Quarterly payments are simply a portion of your annual tax bill that you can pay four times a year instead of paying it all at once at the end of the financial year.
The simple rule is to pay quarterly taxes if your expected tax amount is higher than $1,000. If this is the case, you need to pay a certain portion of your expected tax bill every quarter, depending on the filing dates.
The IRS believes in paying taxes as you go. This is to ensure that the government has a steady supply of funds throughout the year. As a result, if you have not paid enough income taxes during annual filing, you may face a penalty for underpayment.
There are several online estimated quarterly tax calculators that you can use to get an idea of your federal as well as state tax bills. You can also find detailed instructions on this tax on the IRS website.
1099 tax returns are applicable to salaried individuals as well as those who fill out the W-4 form if they have other sources of income apart from their traditional job. Hence, it is important to check the types of 1099 forms and track any reportable income.
Tax filing is a delicate task that needs a lot of attention to detail, which is why you should leave the math to a professional bookkeeping service like Fincent. Our seasoned bookkeepers handle your finances so you can work on increasing your creative output.