Reference
Tax dictionary
The words the IRS and the forms use, explained one at a time, without assuming you already know the others.
- 1099-NEC
- The form a client sends you, and the IRS, reporting what they paid you for your work.
- Adjusted gross income (AGI)
- Your total income minus a specific list of adjustments the law allows.
- Audit
- A review by the IRS checking that what you reported matches what actually happened.
- Capital gains
- The profit when you sell an asset for more than you paid for it.
- Deductions (write-offs)
- Business expenses that reduce the income you are taxed on.
- EIN (Employer Identification Number)
- A nine-digit IRS number identifying a business, usable on client forms in place of your SSN.
- Estimated taxes (quarterly taxes)
- Tax paid to the IRS across the year rather than in one payment at the end of it.
- Form 1040
- The individual federal income tax return that US citizens and residents file.
- Gross income
- Everything you were paid, before any expense, deduction or tax is taken off.
- Home office deduction
- A deduction for a part of your home used regularly and exclusively for business.
- Independent contractor
- Someone who provides services to clients rather than working as an employee.
- IRS (Internal Revenue Service)
- The US government agency that collects federal tax and administers the tax law.
- Itemized deductions
- Specific personal expenses deducted individually, instead of taking the standard deduction.
- Net income (profit)
- What is left after business expenses are subtracted from what you were paid.
- Qualified business income (QBI) deduction
- A deduction of up to 20% of qualifying business income for eligible self-employed people.
- Refund
- Money returned to you because you paid more tax during the year than you owed.
- Schedule C
- The form where a sole proprietor reports business income, expenses and profit.
- Self-employment tax
- The Social Security and Medicare tax paid by people who work for themselves, at 15.3%.
- Standard deduction
- A fixed amount subtracted from your income, taken instead of itemizing.
- Tax bracket
- One of the income bands, each taxed at its own rate.
- Tax credit
- A reduction of the tax itself, dollar for dollar.
- W-2
- The year-end form an employer gives an employee, showing pay and tax already withheld.
- Withholding
- Tax an employer takes out of each paycheck and pays to the IRS on your behalf.
A business that pays you $2,000 or more for your services during the calendar year files a 1099-NEC. One copy comes to you and one goes to the IRS, which is why the income is already known to them before you report it.
That $2,000 threshold is new for 2026. It was $600 from 1954 until the end of 2025, and it is adjusted for inflation in years after 2026. A client who pays you less than the threshold files nothing — but the money is still income, and it is still reported on your return. The form records the payment; it does not decide whether the payment is taxable.
See also: Schedule C, Gross income, Independent contractor
Gross income first, then a defined set of subtractions — deductible traditional IRA contributions and student loan interest are two of the common ones. What is left is your AGI.
It matters out of proportion to its size, because many credits and deductions phase out against AGI rather than against what you actually earned. Two people with the same salary can qualify differently on it.
See also: Gross income, Itemized deductions, Standard deduction
The IRS examines the income, deductions and figures on a filed return against its own records and whatever documentation you can produce. Most begin and end as a letter about one line.
Stocks, property and cryptocurrency are the usual examples. The gain is the sale price less what the asset cost you, and it is taxed differently depending on how long you held it before selling.
See also: Tax bracket
For a deduction to be claimable the IRS requires the expense to be both ordinary — common in your line of work — and necessary, meaning helpful to the business. Software, hardware and the business share of an internet bill are typical.
A deduction lowers the income the tax is calculated on. It is not a refund of what you spent: a $100 deduction saves you $100 × your tax rate, not $100.
See also: Tax credit, Itemized deductions, Schedule C
The IRS issues it to businesses. A sole proprietor with no employees can still request one, which lets you give clients an EIN rather than your Social Security number when they ask for your details.
See also: Independent contractor
Where nobody is withholding tax on your behalf, the IRS expects payment as the income is earned. The four due dates are 15 April, 15 June, 15 September, and 15 January of the following year.
The requirement is generally triggered by expecting to owe $1,000 or more for the year.
See also: Withholding, Self-employment tax
Everything else attaches to it. Schedule C, for instance, works out a business profit and then carries that one number onto the 1040.
See also: Schedule C
For freelance work it is the total of what every client paid you, whether or not any of them sent you a form reporting it.
See also: Net income (profit), Adjusted gross income (AGI)
Both words carry weight. Regularly means an ongoing basis rather than occasionally; exclusively means the space is not also used for anything else. A dining table used for work in the evenings does not meet the exclusivity test.
See also: Deductions (write-offs)
Freelancers, gig workers, consultants and creators are all in this category. The classification is about the working relationship, not the job title, and it determines who is responsible for the tax.
See also: 1099-NEC, W-2, Self-employment tax
Note that state taxes are administered separately, by each state's own revenue department. Meeting your federal obligation says nothing about your state one.
Large medical bills, charitable donations, and state and local taxes are the common categories. It is one or the other: you itemize, or you take the standard deduction.
See also: Standard deduction, Deductions (write-offs)
This is the figure the tax is calculated on, not the gross. A year with high revenue and higher costs can produce a small net income, and the tax follows the net.
See also: Gross income, Schedule C
It applies to income from a qualifying trade or business, subject to limits that depend on your total income and the kind of work.
See also: Net income (profit), Deductions (write-offs)
A refund is your own money coming back, not a payment from the government. It means the amount withheld or paid in instalments was more than the final bill.
See also: Withholding, Estimated taxes (quarterly taxes)
Formally 'Profit or Loss From Business', and it attaches to Form 1040. It records gross receipts, business expenses, and the net profit that results.
That net profit is what carries onto the 1040 and what the self-employment tax is calculated from.
See also: Form 1040, Net income (profit), Self-employment tax
An employee and their employer each pay half of these contributions. Someone self-employed is both, so they pay both halves — 12.4% for Social Security and 2.9% for Medicare, 15.3% together.
It is charged on net earnings from self-employment rather than on gross receipts. The Social Security portion stops once your earnings for the year pass an annual cap; the Medicare portion does not stop.
See also: Net income (profit), Schedule C
The amount is set by law and depends on your filing status, with additions for taxpayers who are 65 or older or who are blind.
See also: Itemized deductions
Rates apply band by band, not to everything you earned. Moving into a higher bracket taxes the income above that threshold at the higher rate — it does not raise the rate on the income below it, which is the most common misunderstanding about how this works.
A credit is worth more than a deduction of the same size. A $1,000 deduction reduces the income being taxed by $1,000; a $1,000 credit reduces the bill by $1,000.
See also: Deductions (write-offs)
It reports what you were paid and what was taken out of it during the year — federal and state income tax, Social Security and Medicare.
See also: Withholding, 1099-NEC
It is a prepayment of the year's tax, not a separate charge. Whether too much or too little was withheld is what decides between a refund and a bill when the return is filed.
See also: Refund, Estimated taxes (quarterly taxes), W-2