Individuals who receive income reported on Form 1099 may be subject to self-employment tax. However, not all 1099 income falls under this category. This article explores the distinction between income subject to self-employment tax and other types of 1099 income.
Key Facts
- Not all 1099 income is subject to self-employment tax. Whether or not 1099 income is subject to self-employment tax depends on whether it is considered income from a trade or business.
- Income reported on Form 1099-NEC, which includes earnings from contracted work, is generally subject to both income tax and self-employment tax.
- Self-employment tax is currently set at 15.3% and consists of Social Security tax and Medicare tax.
- If the net earnings from self-employment are $400 or more, individuals are required to file Schedule SE (Form 1040), Self-Employment Tax.
- Direct sellers, such as newspaper carriers, may be liable to pay self-employment tax if they meet certain conditions, including substantially all of their pay being directly related to sales or other output rather than the number of hours worked.
- If someone is engaged in a trade or business and is not a direct seller, they may still be liable to pay self-employment tax.
- If someone is an employee and their income is subject to income tax withholding, as well as Social Security and Medicare taxes, they may not be subject to self-employment tax.
Income Subject to Self-Employment Tax
Income reported on Form 1099-NEC, which includes earnings from contracted work, is generally subject to both income tax and self-employment tax (eTax.com, 2023). Self-employment tax is a combination of Social Security tax and Medicare tax, currently set at 15.3% (IRS, 2023).
Individuals who engage in a trade or business and have net earnings of $400 or more are required to file Schedule SE (Form 1040), Self-Employment Tax (IRS, 2023). Direct sellers, such as newspaper carriers, may also be liable to pay self-employment tax if they meet specific criteria, including having most of their pay directly tied to sales rather than hours worked (IRS, 2023).
Income Not Subject to Self-Employment Tax
Some 1099 income is not considered income from a trade or business and is therefore not subject to self-employment tax (eTax.com, 2023). This includes:
- Occasional or one-time transactions (Spiesz & Harter, 2009)
- Hobbies or personal activities (Spiesz & Harter, 2009)
- Leasing of a commercial permit with the intention of returning to use (Spiesz & Harter, 2009)
- Negotiation fees paid for assisting in a single sale (Spiesz & Harter, 2009)
- Participation in clinical drug studies or trials (Spiesz & Harter, 2009)
Individuals should report such income as “other income not subject to self-employment tax” on their tax returns (eTax.com, 2023). While this saves them from paying self-employment tax, it also limits their ability to deduct expenses related to the activity (Spiesz & Harter, 2009).
Conclusion
Determining whether 1099 income is subject to self-employment tax is crucial for tax compliance. Income from a trade or business, such as contracted work or direct selling, is generally taxable. However, occasional or non-business-related income is not subject to self-employment tax. By understanding these distinctions, individuals can accurately report their income and avoid unnecessary tax burdens.
References
- eTax.com. (2023). Is my income subject to self employment tax? Retrieved from https://www.etax.com/help/doc/other-income-business-related.htm
- Internal Revenue Service (IRS). (2023). 1099-MISC, Independent Contractors, and Self-Employed. Retrieved from https://www.irs.gov/faqs/interest-dividends-other-types-of-income/1099-misc-independent-contractors-and-self-employed
- Spiesz, J., & Harter, C. (2009). Self-Employment or Other Income? Journal of Accountancy, 206(1), 39-40.
FAQs
What is self-employment tax?
Self-employment tax is a combination of Social Security tax and Medicare tax paid by individuals who are self-employed or have a trade or business. It is currently set at 15.3%.
Is all 1099 income subject to self-employment tax?
No, not all 1099 income is subject to self-employment tax. Only income from a trade or business is taxable.
What types of income are not subject to self-employment tax?
Income from occasional or non-business-related activities is not subject to self-employment tax. This includes income from hobbies, one-time transactions, and certain types of investments.
How do I know if my 1099 income is from a trade or business?
Generally, income from a trade or business is income that you earn from regularly and continuously providing goods or services. It can also include income from activities that you engage in with the intention of making a profit.
What if I receive a 1099-NEC form?
Income reported on Form 1099-NEC is generally subject to self-employment tax. This form is used to report earnings from contracted work or other self-employment activities.
What if I am both an employee and self-employed?
If you have both employee income and self-employment income, you will need to pay self-employment tax on your self-employment income. However, your employee income is not subject to self-employment tax.
How do I file my taxes if I have self-employment income?
If you have self-employment income, you will need to file Schedule SE (Form 1040), Self-Employment Tax, along with your Form 1040. Schedule SE is used to calculate your self-employment tax liability.
Can I deduct expenses from my self-employment income?
Yes, you can deduct certain expenses from your self-employment income. These expenses can include business-related travel, supplies, and equipment.