If you are considered an independent contractor, you will get a 1099-MISC form from the company you provided services for – so long as the payments were at least $600 for the prior year. For many independent contractors, this means filling out a Schedule C, which tallies up the income earned and any deductible expenses. There will also be a need to file a Schedule SE, which accounts for Social Security and Medicare payments. But what if you’re not self-employed?
You now have a document that requires you to pay extra tax, what do you do?
Understanding the 1099-MISC Form
If you find yourself with a 1099-MISC document, and there’s a dollar amount listed in box 7 for Non-employee compensation, the IRS treats that as self-employment income and you’re supposed to pay Social Security and Medicare payments. This is also called self-employment tax which equates to 15% of that income. It is important to know that only dollar amounts in box 7 counts as non-employee compensation. So, if you received dollar amounts in box 1 for rents or box 3 “other income” you don’t have to worry about the extra self-employment tax. The rent goes on your Schedule E for rental income and the other goes on line 21 of your 1040.
But before we dive deeper into your form, let’s get back to that non-employee compensation again. What did you do to earn that money? Is it in your field of work? If the answer is yes, then it’s going to count as self-employment income even if you don’t think of yourself as being self-employed.
For example, let’s say I hire my friend Stephanie who is a CPA to help me prepare tax returns in September and October when I am busy doing personal tax preperation for clients on extensions. If I hired Stephanie to help me with some tax returns, I’d give her a 1099-MISC for the money I paid her and she’d have to report that as self-employment income. Even though Stephanie normally works for another company, she’s still in the business of preparing taxes. The money I pay her for tax prep would definitely be considered self-employment income.
But let’s say I hire Stephanie to plan my wedding instead. Stephanie is not a wedding planner, she doesn’t do that as a business, she’s just helping me out because I need help planning my wedding and I’m helping her out because she needs the money. We’re friends. Planning weddings is not her line of work. So technically, she’s not self-employed and she shouldn’t have to pay self-employment tax on that income. It’s a one shot deal never to happen again. How do you account for that?
Well, back in the day, before 2013, if you received a 1099-MISC for non-employee compensation for under $1000 and you put that amount on line 21 of your 1040—the IRS would let that slide and not audit for self-employment tax. But starting with 2013 tax returns, the IRS has announced that they will send notices to anyone with 1099-MISC income (with non-employee compensation) on line 21 instead of putting it on a Schedule C—where it will be taxed with self-employment tax.
There’s no box to check or form to fill out with your 1040 to say, “Hey, I’m not self-employed! I shouldn’t have to pay self-employment tax!” So what do you do?
What to Do If You Recieve a 1099-MISC Form
The IRS sends letters out to anyone who puts 1099-MISC for non-employee compensation income on line 21. And, they charge fines and penalties for underreporting your tax.
Most people who receive a 1099MISC for non-employee compensation are going to be considered self-employed by IRS standards. You may as well file the schedule C with your tax return and pay the self-employment tax.
Claim the income as business income and write off any and all expenses associated with the job. This is going to be the best choice for people who have expenses with a job like mileage or supplies.
Amended Return 1040X Option
Another option is to file your 1040, pay the self-employment tax, and then file an amended return 1040X taking the income out of self-employment and putting it on line 21 with the explanation that you are not self-employed and the income should not have been subject to self-employment tax.
By filing and paying the self-employment tax first, then amending, you’re giving the IRS the opportunity to examine the situation and make a determination. You may win, you may lose. But if you win—the case is closed and they won’t come back at you. If you lose—it doesn’t matter. You already paid the tax and they can’t fault you.