If you’ve been doing a little consulting on the side you might be surprised when you receive a 1099 MISC form from the IRS in the mail. If you thought you could get away with not paying taxes on that side income, think again. The IRS states that gross income as “all income from whatever source derived.” This gross income will then include compensation for services which means fees and commissions. If a business you have worked with has payed you more than $600 or more a year for your consulting services, they have to report it to the IRS using a 1099-MISC form. That’s how you get a copy of that form as well. Make sure to keep it because you will have to report that income on your tax return.
If this is the first time you are filing a tax return that includes income from self employment sources, you’ll have to get a Schedule C (in some cases C-EZ) and Schedule SE to file with your standard 1040 form. A Schedule C is used to report all gross income from your side activities. You will have to report all income acquired from consulting and similar activities, not just the one that is stated on the 1099-MISC form.
The Schedule C also requires you to file your deductible business expenses. So for example, if you paid for advertising, insurance, legal and other professional services and rent and lease, you will have to report these as well. Subtract these expenses from the gross receipts and the net profit or net loss will be shown on your 1040. If you had a net profit, it will be shown on the Schedule SE. Use the Schedule SE to figure the amount of self-employment tax you have to pay to the state for your business income.
If you’re unsure about these terms or think you have received a 1099 in error, contact an attorney that specializes in tax law.