When you work for someone else, your employer reports your income for you. But when you work for yourself, it’s your responsibility to report your own income. However, that process can be a challenge when you don’t receive a 1099 from one or more of your clients. Even if you don’t receive a 1099 from a client, you’re still expected to report any income you received to the IRS. Regardless of the reason you didn’t receive the form, it isn’t a free pass to avoid paying income tax.
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Reporting Self-Employment Income Without a 1099
Self-employment often comes with more responsibility than working as a W-2 employee. You have to market your business, send invoices and, of course, do the work your clients hire you to do. But sometimes when you do work for those clients, they pay you without issuing a 1099. If that happens, you will still have to report the income to the IRS.
If you are self-employed, you may have several clients who paid you throughout the year. Perhaps some of them sent you a 1099, and others didn’t. To illustrate how this works, let’s consider a simple example where one client sent a 1099, and the other did not.
Remember that the threshold for receiving a 1099 is usually $600. So, perhaps you have one client who paid you $2,000 this tax year, and another who paid you $500. In this case, the one who paid you $2,000 sent you a 1099, and the one who paid you $500 didn’t send one. But you still have to report the full $2,500.
Which Forms Do I Have to Fill Out?
If you are self-employed, each client for which you do work during the year and paid you at least $600 should send you IRS Form 1099-NEC, Nonemployee Compensation. As its name suggests, the purpose of this form is exactly what it sounds like: reporting wages paid to someone not employed by the company. However, although each client is required to issue this form, there are some reasons the form may not be issued. Those reasons include:
- The client paid you less than $600
- Your current address is not on file
- They forgot to send the form
If it is getting close to tax time and you haven’t received your tax forms from a client, follow up with them and see if the form was sent. The IRS requires companies to send these forms by Jan. 31 the year following the year services were provided.
When you file your tax return for the year, you add up all of your income and record it on Schedule C of Form 1040. This form is for reporting your business income and loss when operating as a sole proprietor.
In addition, you must also file Form 1040-SE if you are self-employed. This is the form you use for making estimated or quarterly tax payments.
Reporting Cash Income and Tips
If you receive a cash payment, be it income or a tip, you are expected to report it. Unlike electronic payments, cash won’t be reported automatically. But that doesn’t mean you don’t have to pay tax on that amount; it is still taxable income from the perspective of the IRS. This can complicate things because you won’t have statements you can refer back to in order to add up any cash payments you received throughout the year. That means you will have to take the initiative in keeping track of them.
There are a couple of ways you can track your cash payments. For keeping track of tips, IRS Form 4070-A lets you record information such as the amount of the tip and the date you received it.
Alternatively, you can add them as a transaction in your bookkeeping software – or ask your bookkeeper to add them for you. Generally, adding cash payments manually only takes a few seconds, so it’s easy to add them as you receive cash payments or tips.
Once you determine how much you have received in cash payments, add it to Line 1 of Form 1040 Schedule C, “gross receipts or sales.”
Reducing Your Income Tax When Self-Employed
One way to reduce the tax you owe is to deduct your business expenses. This is because you pay income tax on your net income, not your gross income. Hence, deducting eligible business expenses will reduce how much tax you owe when the time comes. You can deduct a variety of things as business expenses, from your home office to the vehicle you use for business. See the IRS list for more information on things you can deduct.
Bottom Line
Whether you receive a 1099 from a client or not, you are required to pay tax on any self-employment income you receive throughout the year. That amount will be added to your Form 1040 when you file your tax return. If you fail to report any of your self-employment income and you are audited, you may be subject to penalties as well as interest on the tax you failed to pay. In other words, the IRS considers failure to pay a serious offense, and it is probably not worth taking that risk in order to save a few dollars.
Tips for Paying Your Taxes
- A financial advisor could help you mitigate your tax liability. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Calculating your tax can be challenging, but you can estimate how much tax you owe with just a few pieces of information. For instance, SmartAsset’s free income tax calculator can estimate your taxes by using your income, where you live, and your filing status.
- Taxes aren’t always easy to understand, and self-employment makes things even more challenging. To better understand the topic and how it affects your business, learn more about self-employment tax.
- Giving up your hard-earned dollars is never fun, but self-employed people have a lot of options for reducing what they owe. One of the best ways to do that is with tax deductions for the self-employed.
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