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Taxes

I Was Given a 1099. What Do I Do With It?

Most Americans work for an employer and that’s it. When you work for an employer, you generally receive a W-2 tax form and, if that is all you have for the year, filing your taxes can be fairly straightforward.

Although, more commonly now, many Americans are opting for freelance or gig work. This could be their full-time “job,” or for many it is just to supplement their day job income.

When you work for someone and are not classified as their employee, you will generally be given a 1099-MISC at the end of the year in place of receiving a W-2.

On a 1099-MISC form you will likely notice something a little different about it from the usual W-2: More of the fields are likely to be blank.

The reason for this is the employer is generally not required to withhold any federal income tax or FICA taxes from your pay. In addition to this, they generally do not pay any fringe benefits like health insurance or offer any 401ks to their contractors.

But your question is not just what this form is, but what to even do with it. Well, if you were not an employer’s employee and box 7 Nonemployee Compensation has an amount in it, then this might come as a surprise: You’re a business owner!

Yes, if you are not an employee then by default you are a contractor and the employer is actually your client.

There are a few drawbacks and also a few pleasant features about being a contractor. 

The biggest drawback is that the company will not withhold your tax liabilities and you are expected to pay them yourself out of your earnings. On top of this, you are also expected to pay twice as much FICA taxes as an employee. 

The reason for this is there is an employer’s portion of Social Security and Medicare taxes as well as the employee’s portion. Each portion is currently 7.65% of your earnings. Together, it is 15.3% of your earnings. As a contractor, you must pay both portions yourself.

As for your tax return, the amount from the 1099-MISC will be reported on Schedule C Profit or Loss From Business, under Gross Receipts. Unlike an employee, you are allowed to deduct unreimbursed expenses, including business costs of your cell phone and mileage, against your earnings.



This article is not meant to constitute legal or tax advice. For help regarding your situation, please consult a local professional.

By Foxx Financial

We are focused on financial literacy and a want to help others grow assets, reduce and remove debt, or just understand financial concepts better.

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