When Form 1099-MISC Is Issued
Anyone who pays you $600 or more over the course of the year must give you Form 1099-MISC showing the amount. This doesn't mean just single payments of $600 or more. If Joe's Restaurant pays you $50 to fix a leaky faucet in the kitchen one week and $550 on another occasion to repair a pipe, the proprietor should send you a 1099-MISC for $600 even though neither individual payment went over the limit.
When You Must Report the Income
The individual or business who paid you must also file a copy of the 1099 with the IRS. The IRS is aware that you received the money, so you can't avoid reporting it. Even if someone you did work for neglects to issue and file a 1099 -- or if he paid you less than $600 and wasn't required to file the tax form -- you must report the income anyway. In fact, if you made only $400 all year from all sources, not including any W-2 income you might have earned, the IRS says you have to report it.
How Much You Must Report
You probably won't have to pay taxes on all the income you take in as an independent contractor. Your 1099-MISC earnings are reported on Schedule C when you do your taxes. Schedule C also allows you to deduct your costs of doing business. The resulting number is what goes on your Form 1040 as your self-employment income for the year.
You Must Pay Self-Employment Tax
You must also complete and file Schedule SE with your tax return if you earn 1099-MISC income. Schedule SE doesn't work to your advantage the way Schedule C does. It calculates self-employment tax. If you worked for someone else, your employer would pay half your Social Security and half your Medicare taxes for the year. When you work for yourself, you're responsible for 100 percent of these taxes on your own. Completing Schedule SE determines what you owe the IRS for Social Security and Medicare based on your net income after business expenses.
You Should Make Quarterly Payments
Most independent contractors pay estimated quarterly taxes. The IRS wants its tax money as the year progresses, just as it would receive it if your employer had been deducting it from your pay and sending it in on your behalf. If you make payments in advance of April 15, typically four times a year, you can avoid penalties you would otherwise incur by waiting until tax time to pay what you owe.