This is the third article I've published recently that relate to income taxes. Here are the first two:
- Have your income tax returns prepared for free
- Income tax on unemployment compensation and cancelled debts
This third article focuses on 2012 income you received that was reported by your employer on Form 1099-MISC. Specifically, we're looking at income reported on Box 7 of that form, "Nonemployee compensation".
If you receive a 1099-MISC with a dollar figure in box 7, it probably means that you performed work for someone or some company who considered you a contractor rather than an employee. If you had been treated as an employee, you would have received Form W-2 instead of Form 1099-MISC.
If this is the case, the person or company for whom you worked did not pay any Social Security taxes on your behalf and did not withhold any income taxes. Therefore, you are fully responsible for taxes and Social Security. I hope this is not a surprise for you but for many people, it is.
This type income is often reported on Schedule C of IRS Form 1040 when you file your taxes. Basically, this form is for businesses and if you were a contractor, you were operating a business even though it may have been a very simple business. The net profit of your business is reported as income on Schedule C and you are responsible for paying the taxes due. AND, you are responsible for paying Self-Employment tax (Social Security) as well. Even if your income is small and you owe no income tax, you may still owe Self-Employment tax.
Here's a common example. Suppose you were a babysitter for someone and you were paid $5,000 in 2012. It's very possible that the people for whom you babysat reported what they paid you on their tax return so they could claim the Dependent Care credit. If they did this, they had to put your Social Security number on their return as the "contractor" who provided the daycare service. So, the IRS knows about you and your "business". Now, you have to file a return and you probably will owe no taxes. However, you will owe Self-Employment taxes of about $614.00! The people for whom you worked may, or may not, have given you a 1099-MISC.
It may be too late to do anything about this for 2012 income. However, you can spread the pain out a bit for 2013 income by paying quarterly tax estimates to the IRS. You'll use Form 1040-ES.
Then, in 2014 when you file your taxes for 2013, you will have already paid ahead on what you owe and the pain won't be quite so much. Now is the time to plan for this. Don't be surprised again.