What do I do if I receive a 1099 form for income that hasn't been taxed?

As you know, receiving a Form 1099 means that you are not an employee of the firm. You will generally get paid based on an hourly rate and the number of hours you work. You will generally report self-employment income on Schedule C (or C-EZ), and you'll have to pay the following taxes:

15.3% Self-Employment Tax
This is basically your share and your employers' share of social security and Medicare taxes. You are responsible for paying this tax, because there is no Social Security or Medicare tax withheld from the employer. Also, since you're not an employee, the employer won't pay his or her share of these taxes—you will have to pay both the employee and employers' share.

  • 12.4% Social Security Tax and 2.9% Medicare Tax
    There is a cap as to how much you pay each year in Social Security taxes. In 2010, you only have to pay Social Security tax on the first $106,800 that you earn. This figure is indexed higher every year. There is no cap/income limit for Medicare taxes; you pay Medicare tax on all income regardless of how much income you earn.
Estimated Income Federal and (Possibly) State Income Tax
You may have to make estimated income tax payments for both federal and state (if applicable in your state). The need to pay estimated income taxes arises because, when you are a consultant, you do not have any taxes withheld.

You will have to complete the following tax forms:

Schedule C:

http://www.irs.gov/pub/irs-pdf/f1040sc.pdf
We recommend you review this form so you can see what types of expenses you are allowed to deduct against your self-employed income. If you're using turbo tax or other tax preparation software, the program will prompt you for the calculation of these taxes plus the available deductions for self-employed individuals. Additionally, remember to consider the following deductions that you are entitled to as a self-employed person:

  • Work-related expenses
  • 50% of self employment taxes
  • Health insurance premiums

Schedule SE:

This is the schedule that calculates your self-employment tax.
http://www.irs.gov/businesses/small/article/0,,id=98846,00.html

Useful Forms / Publications:

IRS site: www.irs.ustreas.gov
Publication 334: Tax Guide for Small Businesses (including Sch C or C-EZ filers)