The reason you’ll receive an IRS Form 1099 is if you earned income as an independent contractor, sole proprietor, sole owner of an LLC, or a self-employed person.
As a sole proprietor, you work for yourself, while small business owners who run LLCs, partnerships, or corporations may hire employees, independent contractors, or both.
As a self-employed individual, there are certain filing requirements when it comes to tax time. You must pay self-employment tax (SE tax) as well as federal income tax and state tax (if applicable). SE tax is a Social Security and Medicare tax for individuals who work for themselves. If you work for an employer, your company pays half the Social Security and Medicare taxes (7.65%) and you pay the other 7.65%, which your company will withhold from your paycheck.
However, because you do not work for an employer, you are responsible for the total tax amount. As a self-employed individual, you pay the full 15.3% tax, and deduct 7.65% of that tax as a business expense.
If you’re self-employed, you’re responsible for tracking your own income instead of having your income tracked through an employer’s payroll software. As a result, you could make unintentional errors on your taxes.
If you want to keep more of your hard-earned money, take a close look at these seven common mistakes that many individuals make on 1099s, plus four tax tips to help you avoid an audit.