Are you self-employed and unsure how to report your self-employment income without a Form 1099? Self-employed individuals must accurately report their income to the IRS, and a common method is through the use of Form 1099.
However, there may be times when you don’t receive a Form 1099 for your self-employment income. Even when you don’t receive a 1099 from a client, you still need to report any income you receive to the IRS.
In this blog post, we’ll discuss how to report self-employment income without a 1099 in various scenarios such as: if your client forgot to issue a 1099 form, if you received a cash payment, or if you earned income from a foreign client.
This blog on how to report self-employment income without 1099 will cover:
- Reporting self-employment income without a 1099
- How to write off self-employment income?
- What happens if you don’t report self-employment income?
Reporting self-employment income without 1099:
Scenario 1: Your client did not issue a 1099.
If your client did not provide you with a 1099 form, it is your responsibility to report your income on your tax return. To do this, you should keep accurate records of all payments received from your client, including any invoices or receipts. If you use a digital invoicing software like CheckYa, simply export your transaction history and determine your total revenue for the year or quarter.
For example, if you are a freelance graphic designer and earned $5,000 from a client during the year, but the client forgot to issue a 1099 form, you can still report this income on your tax return by including it on Schedule C (Form 1040) under the section titled “Profit or Loss From Business (Sole Proprietorship).” You should also complete Schedule SE (Form 1040) for self-employment tax and pay self-employment tax on your net earnings from self-employment of $400 or more. If you’re using a tax preparation software like TurboTax, simply search for schedule c and input your earnings into the other self-employed section.
It is important to note that there are no tax withholdings for self-employment income, so as a self-employed individual, you may need to estimate tax payments throughout the year to cover your tax liabilities.
Suppose you are not an employee of the payer and are not in a self-employed trade or business. In that case, you should report the income on line 8j of Schedule 1 (Form 1040) under “Additional Income and Adjustments to Income” and any allowable expenses on Schedule A (Form 1040) under “Itemized Deductions.”
Scenario 2: If you received a cash payment:
If you earn money from self-employment and receive some of it in cash, you are required to report this income on your tax return. It is important to keep records of these cash payments, such as a ledger or receipts, to prove the income you earned. The IRS also provides a form to track these earnings.
For example, suppose you babysit part-time and receive $1,000 in cash payments from parents during the year. In that case, you will need to include this income on your Schedule C, which shows your business income and expenses and calculates your net income from self-employment. To report your cash income, simply add it to the “gross receipts” on line 1 of the form.
Scenario 3: If you received payment from a foreign client.
If you are a U.S. citizen or resident, you are required to report your worldwide income on your tax return. This means that you must not only report income you receive from U.S. sources, but you must also report income you receive from foreign sources.
You report your foreign income where you normally report your U.S. income on your tax return. Earned income (wages) is reported on line 7 of Form 1040; interest and dividend income is reported on Schedule B; income from rental properties is reported on Schedule E, etc.
Let’s say you are a U.S. citizen living in the U.S., and you run a consulting business. During the year, you received payment from a client in Canada for consulting services you provided. In this case, you would report the income from the foreign client on your tax return as earned income (wages) on line 7 of Form 1040.
To summarize all three scenarios better, say you received two 1099-NECs from freelancing clients. One reported $5,000 in NEC (nonemployee compensation), while the other reported $3,000. Together, that’s $7,000 in income that the IRS already knows about.
Let’s assume you also made some additional income that is not reported on any1099s: say, $1,000 in cash and from foreign clients from other gigs.
When you report your total self-employment income, you’ll add that $1,000 to the $7,000. This gets you a gross income of $8,000.
Now that you have learned the different ways to report your self-employment income when you don’t have a 1099. Let’s look at some of the top ways by which you can write off these.
How to write off self-employment income?
1. Home office expenses:
As a freelancer, you can write off the expenses related to your home office as long as it is a dedicated space used solely for your business. This includes rent or mortgage, utilities, and any repairs or maintenance.
There are two ways to calculate home office expenses as per the IRS:
1.1. Regular method: This method involves calculating the actual expenses incurred for the home office, such as utilities, rent, repairs, and maintenance. The deductible amount is calculated by multiplying the percentage of the home used for business purposes with the total expenses.
Example: If your home office occupies 10% of your home and your total expenses for the year are $20,000, your deductible home office expense will be $2,000 (10% * $20,000).
1.2. Simplified method: This method allows you to claim a fixed rate for each square footage of the home office. The rate is currently set at $5 per square foot, with a maximum deduction of $1,500 per year.
Example: If your home office is 200 square feet, your deductible home office expense will be $1,000 (200 sq ft * $5/sq ft).
To give a real-world example: Say a graphic designer who works out of their home studio has a designated workspace that takes up about 300 square feet of their apartment, a computer specifically used for work purposes, and a subscription to a design software program. All of these items are tax-deductible home office expenses, as they are used solely for the purpose of conducting business.
The graphic designer can also deduct the cost of any software or design tools they use and any industry-specific training courses they attend. Additionally, if they purchase a new computer or upgrade their software, they can also claim those expenses as tax deductions to reduce their overall tax liability.
2. Vehicle use deduction:
If you use your personal vehicle for business purposes, you may be able to claim a tax deduction for the expenses associated with this use. This includes things like fuel, maintenance, and insurance.
To deduct vehicle use expenses, you can either use the standard mileage rate or actual expenses method.
2.1. Standard mileage rate: This method allows you to calculate the deductible amount based on the miles you drove for business purposes. The IRS sets the standard mileage rate each year and it is currently $0.625 per mile for 2022.
For example, if you drove your car for 5,000 miles for business purposes in a year, you can claim a deduction of $3125 (5,000 x $0.625).
2.2. Actual expenses method: This method allows you to deduct the actual expenses you incurred while using your vehicle for business purposes. These expenses may include gas, oil, repairs, insurance, and depreciation.
For example, if you incurred $1,000 in gas expenses and $500 in repairs for business purposes in a year, you can claim a deduction of $1,500.
You can choose to use either the standard mileage rate or the actual expenses method for your vehicle deductions, but you cannot use both methods for the same vehicle in the same tax year.
3. Travel deduction:
If you travel for business purposes, you may be able to claim a tax deduction for your travel expenses. This includes things like airfare, hotel accommodations, and meals. You can also claim a deduction for any other necessary expenses related to your business travel, such as transportation to and from the airport or business meetings. In order to claim this deduction, you must keep detailed records of your travel expenses and be able to prove that the travel was for business purposes.
4. Meals deduction:
If you incur meal expenses while traveling for business, you may be able to claim a tax deduction for a portion of these expenses. The specific percentage that you can claim as a deduction will depend on the nature of your business and the circumstances of the meals. For example, if you take a client out to lunch to discuss business, you may be able to claim the cost of the meal as a business expense.
5. Internet and phone bill deduction:
If you use your personal phone or internet service for business purposes, you may be able to claim a tax deduction for a portion of the expenses associated with these services. The specific percentage you can claim as a deduction will depend on the percentage of your total phone and internet usage related to business. It is important to keep detailed records of your business phone and internet usage in order to claim this deduction.
What happens if you don’t report self-employment income?
If you don’t report your income to the IRS, you may face a number of consequences:
- Penalties: The IRS may charge you penalties for failing to report your income. Depending on the circumstances, these penalties can be substantial, ranging from 5% to 25% of the tax you owe.
- Interest: If you owe taxes and don’t pay them by the deadline, the IRS will charge you interest on the unpaid amount. This interest can add up quickly, and it compounds daily.
- Criminal charges: In extreme cases, the IRS may pursue criminal charges against you for failing to report your income. This could result in fines, imprisonment, or both.
- Audit: The IRS may audit your tax returns if they suspect that you have not reported all of your income. An audit can be a lengthy and stressful process, and it may result in additional taxes and penalties.
It is also important to understand self-employment’s tax implications and properly calculate and pay self-employment taxes. By following these guidelines and seeking help from a tax professional, you can ensure that you are accurately reporting your self-employment income and paying the necessary taxes. Keeping good records of all income earned and expenses incurred allows you to easily report your self-employment income without needing a 1099 form.
One way to help you keep track of your income is by invoicing your clients through CheckYa’s invoice feature. This way all your payment history is in one place, making it easier on you when tax time comes around. CheckYa’s invoicing feature allows you to accept payment in over 200 different currencies and split or pass your transaction fees to your clients. Try it out today with no obligations or credit card signup required.