Keyword: Nonemployee Compensation

This is archived information that pertains only to the 2005 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

I received a Form 1099-MISC instead of a Form W-2. I'm not self-employed, I do not have a business. How do I report this income?

If payment for services you provided is listed in box 7 of Form 1099-MISC (PDF), you are being treated as a self-employed worker, also referred to as an independent contractor. You do not necessarily have to "have a business," but simply perform services as a nonemployee to have your compensation treated this way. The payer has determined that an employer-employee relationship does not exist in your case. That determination is complex, but is essentially made by examining the right to control how, when, and where you perform those services. It is not based on how you are paid, how often you are paid, nor whether you work part-time or full-time. There are three basic areas that are relevant to determine employment status:

behavioral control,
financial control, and
relationship of the parties

For more information on employer-employee relationships, refer to Chapter 2 of Publication 15 , Circular E, Employer's Tax Guide and Chapter 2 of Publication 15-A (PDF), Employer's Supplemental Tax Guide. If you think that you were, or are, an employee and you would like the IRS to issue a determination, you may submit Form SS-8 (PDF), Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Unless you think you were an employee, you report your nonemployee compensation on Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship), or Form 1040, Schedule C-EZ (PDF), Net Profit from Business. You also need to complete Form 1040, Schedule SE (PDF), Self-Employment Tax, and pay self-employment tax on your net earnings from self-employment, if you had net earnings from self-employment of $400 or more. This is the manner by which self-employed persons pay into the social security and Medicare trust funds. Employees pay these payroll taxes, as well as income tax withholding, through deductions from their paychecks. Generally, there are no tax withholdings on self-employment income. However, you may be subject to the requirement to make quarterly estimated tax payments. If you did not make estimated tax payments, you may be charged an underpayment of estimated tax penalty.

I am self-employed. How do I report my income and how do I pay Medicare and social security taxes?

You are a sole proprietor if you are the sole owner of a business that is not a corporation. Report your income and expenses from your sole proprietorship on Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship), or on Form 1040, Schedule C-EZ (PDF), Net Profit from Business.

If the total of your net profit from all businesses is $400 or more, you must pay into the Social Security and Medicare systems by filing Form 1040, Schedule SE (PDF), Self-Employment Tax. Self-Employment tax consists of the Old-Age, Survivors, and Disability Insurance (social security) and the Hospital Insurance (Medicare) taxes. For more information refer to chapter 1 of Publication 334, Tax Guide for Small Business.

The Federal tax system is based on a pay-as-you-go plan. Tax is generally withheld from your wages or salary before you get it. However, tax is generally not withheld from self-employment income. Thus, you may be required to make estimated tax payments. Publication 505, Tax Withholding and Estimated Tax, provides information on making estimated tax payments.

What is the difference between a Form W-2 and a Form 1099-MISC?

Both of these forms are called information returns. The Form W-2 is used by employers to report wages, tips and other compensation paid to an employee. The form also reports the employee's income tax and Social Security taxes withheld and any advanced earned income credit payments. The Form W-2 is provided by the employer to the employee and the Social Security Administration. A Form 1099-MISC is used to report payments made in the course of a trade or business to another person or business who is not an employee. The form is required among other things, when payments of $10 or more in gross royalties or $600 or more in rents or compensation are paid. The form is provided by the payor to the IRS and the person or business that received the payment.

How do you determine if a person is an employee or an independent contractor?

The determination is complex, but is essentially made by examining the right to control how, when, and where the person performs services. It is not based on how the person is paid, how often the person is paid, nor whether the person works part-time or full-time. There are three basic areas which determine employment status:

behavioral control
financial control and
relationship of the parties

For more information on employer-employee relationships, refer to Chapter 2 of Publication 15, Circular E, Employer's Tax Guide and Chapter 2 of Publication 15-A (PDF), Employer's Supplemental Tax Guide. If you would like the IRS to determine whether services are performed as an employee or independent contractor, you may submit Form SS-8 (PDF), Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Unless you think you were an employee, you should report your nonemployee compensation on Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship), or Form 1040, Schedule C-EZ (PDF), Net Profit From Business. You also need to complete Form 1040, Schedule SE (PDF), Self Employment Tax, and pay self employment tax on your net earnings from self employment, if you had net earnings from self employment of $400 or more. This is the method by which self employed persons pay into the social security and Medicare trust funds.

Generally, there are no tax withholdings on this income. Thus, you may have been subject to the requirement to make quarterly estimated tax payments. If you did not make timely estimated tax payments, you may be assessed a penalty for an underpayment of estimated tax. Employees pay into the social security and Medicare trust funds, as well as income tax withholding, through payroll deductions.

If you are not sure whether you are an independent contractor or an employee, complete Form SS-8 (PDF), Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding. For more information on employer-employee relationships, refer to Chapter 2 of Publication 15, Circular E, Employer's Tax Guide and Chapter 2 of Publication 15-A, Employer's Supplemental Tax Guide and Publication 1779 (PDF), Employee Independent Contractor Brochure. For information on the tax responsibilities of self-employed persons, refer to Publication 505, Tax Withholding and Estimated Tax.

I made some money repairing radios and television sets last year. How do I report this income?

This is self employment income. A person with income from Self-Employment files Form 1040, Schedule C (PDF), Profit or Loss from Business, or in some cases, files Form 1040, Schedule C-EZ (PDF), Net Profit from Business to report the profit or loss from the business, and files Form 1040, Schedule SE (PDF), Self-Employment Tax to figure Social Security and Medicare Tax. Refer to Tax Topic 407, Business Income, , and Publication 334, Tax Guide for Small Business, for additional information. Since there is no withholding on your self-employment income, you may need to make quarterly estimated tax payments. This is done using a Form 1040-ES (PDF), Estimated Tax for Individuals.

Previous | FAQ Index | Next

Tax Topics Index | FAQs Index

2005 Tax Help Archives | Tax Help Archives Main | Home