Here’s a common misconception: if you earn less than $600 as a freelancer, independent contractor, or gig worker, you don’t need to report it on your taxes.
Let’s make this simple: that is not true.
The IRS requires you to report all income, whether it’s from running your own business, raking a neighbor’s lawn, or working a side gig that pays you cash. Failure to do so can result in hefty interest payments.
So where does the confusion come from? In short, the rules for reporting income are not the same as the rules for receiving a 1099 form, because of course the IRS wants to make things complicated! Let’s dig into it.
Do you get 1099 forms if you make under $600?
When you’re being paid by a client, they’re only required to file a 1099 form if you earned more than $600 from them in a calendar year. (They can file one for a lower amount, but since most people aren’t eager to fill out more tax forms, they usually don’t.)
If you don’t get a Form 1099-NEC from one of your clients (or a Form 1099-K from a third-party payment app), it’s easy to assume you don’t need to report that income. After all, the IRS will never know about it, right?
Unfortunately, this sort of thinking can lead to a world of pain. If the IRS finds income you were supposed to file taxes on, but didn’t, you’ll owe interest on that amount.
Even if the IRS doesn’t catch your mistake right away, that doesn’t mean they won’t catch it later. The interest starts building up from the due date for the tax you should have paid — not the date they caught you.
Ultimately, underreporting could result in years of accumulated interest and a massive tax bill. Your effort to save money could end up losing you more than you made in the first place.
That’s why you should always report your income on your taxes — even if you don’t receive a 1099 form.
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What about the self-employment tax exemption?
The good news for gig workers and side hustlers: If your self-employment gig is small enough that you’ve made less than $400 of taxable income during the tax year, you won’t have to pay taxes on it.
Now, this $400 exemption won’t save you if the bulk of your income comes from self-employment, independent contracting, or freelance work. But people with small side gigs can sometimes get away with not owing any taxes on that portion of their income.
Keep in mind, though, there’s a difference between paying taxes and reporting your self-employment income to the IRS. And reporting is always mandatory, even if you make less than $400!
Finding your taxable income
Even if you’ve earned more than $400 in total income, you might not have $400 in taxable income. Taxable income is determined by taking your total income and subtracting all your business expenses.
What are these deductible business expenses? If you’re a driver for Grubhub (for example), you’re going to be putting a lot of miles on your car that you otherwise wouldn’t. Those car-related write-offs can really add up. That’s why you’re allowed to claim them as write-offs, cutting a hefty chunk off your taxable income and saving you money on your self-employment tax.
The same goes for people who want to claim a home office deduction, client lunches, or many other things you spend money on to run your business.
Before you file, always make sure you’re taking the most off in deductions that you possibly can. To help you out, Keeper automatically reviews your transactions and marks which ones qualify for business write-offs, and can file those returns for you once you’re done!
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Preparing to pay your self-employment tax
If your business earns $400 or more even after deductions, you’ll need to pay self-employment tax.
Self-employment tax is basically a fancy way of saying you need to pay the full value of the Federal Insurance Care Act (FICA) taxes, a combination of Social Security and Medicare taxes.
When you work for an employer, a portion of your income is set aside for taxes, including FICA, for which you pay 7.65%. Your employer also pays another 7.65% in FICA taxes on your wages.
But when you’re self-employed — even if it’s just a side hustle — you are the employer. That means your self-employment income is now subject to both the 7.65% of FICA you’d normally pay, and the 7.65% your employer would pay.
This combined 15.3% tax rate can be both surprising and alarming, especially if you’ve only ever worked as an employee. That’s why we’ve developed a self-employment tax calculator to help you budget smarter throughout the year. So when tax time rolls around, you’re already prepared for your bill.
It’ll also help you know how much you should set aside to pay your quarterly taxes, which you’ll need to pay if you expect to owe more than $1,000 a year.
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How to report your self-employment income under $600
Whether you make $5 or $599, filing taxes on income less than $600 doesn’t need to be scary.
Yes, it involves a few more forms than you might be used to, but once you get the hang of it, these forms are fairly straightforward — at least as far as tax forms go!
Schedule C
Your Schedule C form is going to be where you calculate that taxable income we’ve been talking about.
On it, you state what sort of business you’re filing for. (If you have more than one source of self-employment income, you’ll need to fill out a separate Schedule C for each type of business.) You also provide a detailed breakdown of your business expenses by category.
Make sure you can reliably back up your claims — remember, the IRS doesn’t take kindly to people padding their expenses for a lower tax bill.
The top line of Schedule C is where you’ll list all your gross income not covered by regular wages — whether you received a 1099 for them or not. Total up all those less-than-$600 payments, along with anything larger, and report it here!
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Schedule SE
Once you’ve found your taxable income, you’ll use that number to figure out how much you owe for self-employment tax.
Your self-employment taxes are calculated and reported on Schedule SE. (Yup, that’s what the “SE” stands for!)
Enter in the amount of taxable income you calculated using Schedule C. Schedule SE will then take you through the process of figuring out how much tax you owe from self-employment — including how much of your self-employment tax you can write off on your income taxes. (We know, it’s weird using one tax to lower another tax— but who’s going to complain about a lower tax bill?)
Remember: Even business owners and self-employed people who earned less than $400 still need to fill out both the Schedule C and Schedule SE. You just won’t owe any taxes in the end.
Reporting self-employment income can take a lot of getting used to, whether you’re earning extra spending cash or are building the beginning of a financial empire. The sooner you know all the myths and pitfalls to avoid, the more confident you can be when submitting those tax forms.
Just keep track of all income you receive, know what deductions to take, and don’t try to sneak small payments by hoping the IRS won’t notice.
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At Keeper, we’re on a mission to help people overcome the complexity of taxes. We’ve provided this information for educational purposes, and it does not constitute tax, legal, or accounting advice. If you would like a tax expert to clarify it for you, feel free to sign up for Keeper. You may also email support@keepertax.com with your questions.
