Unless specifically exempted from taxation by statute, you must claim all income on a return regardless of the amount.
Whether you’re a full-time self-employed entrepreneur or just do some freelance work on the side, you have to report every dollar you earn on a tax return. Companies and individuals who pay you at least $600 in a year for the services you perform will report your compensation on Form 1099-MISC. But even if you don’t receive a 1099-MISC, you still have to claim income under $600 on your taxes.
The 1099-MISC $600 Reporting Threshold
Not receiving a 1099-MISC doesn’t change the fact that all of the income you earn from self-employment activities is taxable and must end up on your return. The $600 threshold for nonemployee compensation is merely a 1099-MISC reporting requirement that the Internal Revenue Service imposes on the payer. In other words, charging a client $599 rather than $600 so you don’t receive a 1099-MISC doesn’t save you money in tax -- other than the savings from reporting one less dollar on your return.
Tax Return Filing Requirements for the Self-Employed
The IRS requires you to file a tax return in any year your net self-employment earnings -- the taxable amount after deducting related business expenses -- are at least $400. In contrast, a taxpayer who isn’t self-employed generally doesn’t have to file a return unless his total annual income is equal to or greater than the sum of the standard deduction for his filing status and one personal exemption -- two personal exemptions if filing jointly.
Claiming Income under $600 on C-EZ
Since your total nonemployee compensation for the year is under $600, you can generally report it on Schedule C-EZ rather than Schedule C -- the full-length version of the form -- if your deductible business expenses are under $5,000. The advantage of using Schedule C-EZ is that you only have to enter your gross receipts, subtract business expenses -- reported as a total rather than itemized by type of expense -- and compute your net profit. If you do receive any 1099-MISC forms for the year, include the amounts reported in box 7 in gross receipts as well. The net profit figure then flows to the Business income line of your 1040 and is ultimately included in your taxable income. (Refs 3 and 4)
Paying Self-Employment Taxes
One drawback of having to claim self-employment earnings is paying self-employment tax on it in addition to the income tax. To figure out how much you owe, the IRS requires you to prepare and file a Schedule SE attachment to your return. The self-employment tax will cost you 15.3 percent of your net profit and is comprised of a 12.4 percent Social Security tax and a 2.9 percent Medicare tax. And since you don’t have an employer who pays 50 percent of these taxes for you, approximately one-half of your self-employment tax bill is deductible as an adjustment to income on your 1040.
- Internal Revenue Service: Instructions for Form 1099-MISC
- Internal Revenue Service: Publication 501 – Exemptions, Standard Deduction, and Filing Information
- Internal Revenue Service: Self-Employed Individuals Tax Center
- Internal Revenue Service: Schedule C-EZ (Form 1040)
- Bradford Tax Institute: History of Self-Employment Tax Rates - 1951-2015
- Internal Revenue Service: Form 1099-MISC