One of the nice things about receiving a 1099-MISC rather than a W-2 is you can claim deductions on your Schedule C, which you use to calculate your net profits from self-employment.
The deductions must be for business expenses the Internal Revenue Service considers ordinary and necessary for your self-employment activities.
An expense is ordinary if it is incurred by self-employed individuals in a similar field.
An expense is necessary if it is helpful to you in completing your work. An expense does not have to be essential to be necessary.
For example, the cost of sophisticated computer software is an ordinary and necessary expense for a freelance graphic designer.
On the other hand, the cost of hiring a limousine to travel to clients may be helpful, but is not ordinary by tax standards.
You can file the shorter Schedule C-EZ if your deductible business expenses are $5,000 or less. Whether you use Schedule C or C-EZ, you will calculate your net profit by taking your total self-employment income, including those earnings not reported on a 1099-MISC, and subtracting the deductible business expenses you incur.
Video: How to Read a 1099 MISC IRS Form
The final net profit figure must be transferred to Form 1040 and combined with your other earnings to calculate your taxable income.
Estimated tax payments
One thing you’ll notice on your 1099-MISC forms is that your clients don’t withhold income tax from your payments like they do for their employees. This does not mean, however, that you can wait until you prepare your tax return to pay 100 percent of the income tax you owe.
Instead, you may have an obligation to make up to four estimated tax payments to the IRS during the year. The amount and frequency of your estimated payments depends on how much income you earn, the tax withheld from other employment income, and the method you choose to calculate your estimated taxes.
Use Form 1040-ES to figure out your estimated tax obligations.