Updated: Jul 7, 2020
There has got to be a joke that Box 1 of the 1099-NEC is for workers, fish, and attorneys. I’ll start: An Uber driver, a tilapia, and a lawyer walk into a bar...
It is March, and you’re doing your taxes. You enter the income from your W-2 and see that you are getting a refund. Next on your tax-paper pile is another form. Oh, yeah – it’s the $6,000 you earned in April of the previous year from your side job during Masters Golf Week working at Augusta National. You enter the $6K in from Box 7 of the 1099-MISC form and see a chilling change. That tax refund is now a bill due. What happened?
First, Realize That “Income” Is Taxed
It’s great to receive money. Your paycheck, holiday cash, rebates, dividends from stock your grandma bought a decade ago, a quarter at your feet. However, the money you earn today becomes part of your earnings this year and starts a “tax-owed” tab. Some money, like gifts or life insurance proceeds, aren’t taxed. But money you earn by working (or by having your money work for you by earning dividends) is taxed.
Second, Understand the Process When You Are a Regular Employee at a Job
When you earn income at a job where you are a regular employee, your employer takes care of many of the tax issues surrounding your income. There are two main types of tax burdens are:
Income taxes as a regular employee
Our Federal government taxes workers on the money they earn. Most state governments do, too. These taxes go on the Form 1040 (and the comparable state tax form) and with that form comes different deductions and credits that can help you reduce your taxable income. With each paycheck, your employer withholds (puts away for you) and sends to the IRS an estimated amount that goes to your annual tax bill. If your employer didn’t pull out these taxes for you, you’d have to do it yourself and send “Estimated Tax Payments” to the IRS because that rev