If you bought a computer or office supplies as part of your self-employment, you can deduct your office supplies or office equipment from your taxes. There are specific tax forms that you should fill out during the current tax season. If you are self-employed or working on a contract basis with no taxes withheld, you may fill out different tax forms.
This includes a 1099-NEC (formerly reported on Form 1099-MISC) or Form 1099-K if third-party payment services like PayPal pay you. Effective tax year 2020, freelancers, consultants, and gig economy workers earning $600 or more are required to fill out 1099-NEC. Before 2020, self-employed individuals received a 1099-MISC.
Before learning the difference between 1099-MISC, 1099-NEC and 1099-K, it is important to understand who qualifies as self-employed/contractor.
Who Qualifies as Self-Employed/Contractor
IRS defines self-employed/independent as an individual who has the right to control or direct only the result of the work and not what will be done and how it will be done.
An independent contractor can be any individual who earns their livelihood by providing services to the public and doesn’t work under a traditional employer-employee partnership. For instance, doctors and lawyers with a private practice, IT or web designers, and online freelancers.
What is Form 1099-NEC? Who Receives Form 1099-NEC?
Self-employed individuals/independent contractors such as freelancers or side-jiggers who receive $600 or more in salary get Form 1099-NEC (non-employee compensation). A 1099-NEC may not apply if they are earning under $600, but they must still report all their income. A self-employed person must report their income if their net earnings from their job are $400 or more.
Upon receiving a 1099-NEC, the individual can report their income and claim deductions against that income on a Schedule C. It will further lower their taxable income from self-employment.
What is Form 1099-K? Who Receives a 1099-K?
Credit card companies and third-party processors like PayPal use Form 1099-K (Payment Card and Third Party Network Transactions) to report transactions processed for retailers or other third parties.
A taxpayer receives a 1099-K if they accept credit, debit, or prepaid cards and have more than $20,000 in sales. Furthermore, it requires over 200 individual transactions through a third-party processor. It is used to report the gross amount of the transactions. Your on-demand economy partner must provide you with relevant information to translate the 1099-K information into income and expenses to report.
Effective January 2023, if any self-employed person receives payment for goods and services through a third-party payment network like PayPal, their income will be reported on Form 1099-K if the amount exceeds $600.
What is Form 1099-MISC? Who Receives a 1099-MISC?
The IRS replaced Form 1099-MISC with Form 1099-NEC for the self-employed. As a result, while previously self-employed and gig economy workers received 1099-MISC, they will receive 1099-NEC for many purposes. However, there’s a possibility that you may still receive a 1099-MISC for any other miscellaneous income you earned. Here’s a list of some other types of income reported on Form 1099-MISC:
- $10 or more in royalties or broker payments in lieu of dividends or tax-exempt interest.
- $600 or more in – rent, prizes and awards, medical and health care payments and cash payments for fish (or other aquatic life) you purchase from someone engaged in the trade among other factors.
How You Should Prepare
When it comes to tax-related documents, it is crucial to keep accurate and comprehensive records to stay compliant with these forms. According to experts, employers should closely track all independent contractors to make sure those who meet or exceed the 1099-NEC threshold receive a Form 1099, among others.
In the end, start working on these forms and review your tax situation as soon as possible.
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