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Dear Tax Guide,


My husband is doing taxes right now. Do I need to declare my 1099-MISC income as self-employed business income or wage income? Thanks!

Dear Reader,

You need to report your income as a self-employed person. Your income as reported on your 1099-MISC goes on Schedule C, line 1 ("Gross receipts or sales").

The really really nifty thing about a Schedule C is that you can reduce your income by any and all business-related expenses. You only pay tax on your net profit (income minus expenses). So, for example, if you earned $2,000 but spent $1,500 on a new computer (and the computer is used entirely for business), then your net profit is $500.

There's lots of other, more complex, rules around self-employment, but this is the gist of things.

But here's a tip that's worth memorizing. As a self-employed person you pay two different taxes on your business profits: regular income tax and self-employment tax. (More about the Self-Employment tax.) The self-employment tax is 15.3% of your net profit, on top of the regular income tax. So, in our example of $500 profit, your self-employment tax would be $77. SE Tax is calculated ONLY IF your net profit on your schedule C is OVER $400. So, for our example of $2,000 income and $1,500 computer expense, I bet you could find at least another $100 in business expenses (paper, office supplies, toner, internet service, books, etc.) in order to bring the net profit down to $400 or less. Capice?

I'm NOT suggesting you make up business expenses you don't have (that's an unacceptable audit risk). I am suggesting that as a self-employed person you are in the position of managing your tax situation to your own advantage. I have seen self-employed people who want to pay the self-employment tax (because they are close to retirement and need extra Social Security credits), and on the other hand I see young self-employed people who want to avoid paying into Social Security system.

Best wishes this filing season,

William

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