by Anne Lane
If you've been doing a little moonlighting as a consultant, you may be a little bit surprised to get one or more IRS forms 1099 MISC in the mail come January. If you thought you weren't going to have to pay taxes on that "extra" income, think again. The IRS defines gross income as "all income from whatever source derived." Included in gross income are compensation for services, including fees and commissions. If a business pays you $600.00 or more in a year for your consulting fees, they have to report it to the IRS on form 1099-MISC. You'll receive a copy of the 1099-MISC too. Don't throw it away; you'll need to report that income on your return.
Since this is likely your first time filing a tax return that includes your income from self employment, you'll need to get a Schedule C (or C-EZ) and Schedule SE to file with your 1040. You will use the Schedule C to report all the gross receipts from your side business. You need to report all of the income you received from your consulting, not just those amounts for which you received a 1099-MISC. Even though a business needs to pay you a minimum of $600 before they are required to submit a 1099-MISC, you are required to report all the income you receive from all sources, even if it is less than $600.
You'll also report your deductible business expenses on the Schedule C. Examples of deductible business expenses include advertising, insurance, legal and professional services, office expenses, and rent or lease expenses. You'll subtract your expenses from your gross receipts and the net profit or net loss will be shown on your 1040. If you had a net profit, that amount will also be shown on the Schedule SE. You use Schedule SE to figure the amount of self-employment tax that you owe on your business income.
If the idea of reporting your side line income and paying tax on it has come as a bit of a surprise to you, you may be surprised to find out about some of the other legal requirements that are imposed on your enterprise. You will probably need to get a local business license, a state gross receipts tax identification number, and to report your income on your state tax return as well. If all of this is news to you, check out the related article called "Legal Issues to Consider When Starting Your Business" for more information.
If you aren't already doing so, you should make sure your bookkeeping is in order as well. Filing a Schedule C can more than double the likelihood that the IRS will audit you. Your best defense is keeping good records of your income and expenses.