Let’s face it, being an independent contractor is pretty great — you can work when you want, where you want, and at the end of the day, you're the boss of your own small business. However, being in charge means paying your own taxes, and you might know a little about many things, but “file taxes as a 1099 independent contractor” isn’t probably on your list.
Wait, what’s a 1099?
The fast answer — and the first thing to learn — is that you get paid differently when you work for yourself, and this affects how you file and pay your taxes. While you have additional freedom as a 1099 independent contractor, you also have extra responsibilities your W-2 counterparts don’t have to worry about.
Read on for an overview of how to file as an independent contractor or freelancer, so you don’t get fined or penalized this tax season when it’s time to pay your taxes.
Quick jumps:
- Getting paid as an independent contractor
- Taxes 1099 independent contractors need to pay (aka tax liability)
- What are estimated tax payments?
- Common independent contractor tax forms
- How does an independent contractor pay taxes?
Getting paid as an independent contractor
Employees who work for someone else have state, federal, Social Security and Medicare taxes withheld from every paycheck they receive. If you’ve ever worked for someone, you’ve probably seen these withholdings on your paystub. However, if you’re an independent contractor, it doesn’t work that way.
As an independent contractor, when your clients send payment for your work, you get the whole amount, with no taxes taken out.
However, this doesn’t mean you don’t owe taxes on that money.
Instead, as a self-employed person, it’s your responsibility to set aside enough money to pay your taxes by the filing deadline.
Taxes 1099 independent contractors need to pay (aka tax liability)
When you’re a self-employed individual, you’re running the show, and you need to handle what a company’s payroll team does: take out taxes from wages. The two taxes independent contractors need to pay are self-employment tax and state and federal income tax.
Self-employment tax
The self-employment tax rate is 15.3% of your net business income. The rate comprises two parts: 12.4% for Social Security taxes and 2.9% for Medicare taxes. These federal payroll taxes are called “FICA,” which you might have seen on a paystub before. When you’re an employee, you pay half the FICA, and your employer pays the other half.
Here’s the thing, though: when you’re a business owner, you’re paying both portions of FICA — the employee side and the employer side.
The Internal Revenue Service (IRS) knows this isn’t fair for self-employed individuals, so they allow them to deduct the employer portion as a business expense when figuring out their adjusted gross income. (More on deductions later!)
Income tax
Just like every other taxpayer, you need to pay income tax. This amount is based on your total income for the year minus deductions.
Remember, self-employment income is compensation in any form, including cash, virtual currency (including cryptocurrency), goods and property.
Check the IRS’s page for taxable and non-taxable income.
What are estimated tax payments?
Because you don’t have an employer withholding (and paying) these taxes for you on every paycheck, the IRS wants you to make quarterly estimated tax payments instead of one lump sum on tax day. It’s an “estimated” payment because you estimate how much income you’ll make and pay taxes based on the estimate.
You’ll need to make quarterly tax payments if you meet both these requirements:
- You’re filing as a sole proprietor, a partnership or a corporation.
- You expect to owe $1000 or more when you file.
Quarterly payment due dates are in April, June, September and January of the following year.
You can calculate estimated tax payments using Form 1040-ES. It contains a worksheet that can help figure out these taxes. You can use the vouchers in the 1040-ES booklet to make your payments by mail, or you can pay online.
Similarly, online estimated tax calculators like Turbotax’s can help you. Accounting software like this does double duty by calculating the tax and filing returns.
It’s important to calculate your payments accurately because you may have to pay a penalty if you don’t pay enough throughout the year.
You can avoid penalties if you make quarterly payments of at least 90% of the amount owed for the current tax year. Or you can pay 100% of the taxes you paid the previous year — whichever is smaller.
When you file your annual tax return, if you’ve paid too much estimated tax, you’ll get a refund. And if you pay too little, you’ll owe additional taxes.
Get to know common independent contractor tax forms
All IRS forms discussed here come with instructions that explain how and when to complete them. Of course, the ultimate word comes from the IRS website, which has up-to-date tax information for self-employed professionals.
1099 contractor form
When you're an employee, your employer sends you a Form W-2 that lists your income and all the deductions withheld from your pay throughout the year, including federal, state and FICA taxes.
However, you won't get a tidy W-2 listing this information as a nonemployee. Instead, every client that paid you more than $600 is required to send you a 1099 contractor form; it will be either a Form 1099-NEC (nonemployee compensation) or a Form 1099-MISC. Clients that paid you less than $600 don’t have to send one.
In theory, if you add up all the 1099s you receive, it should equal your gross income for the year. But don’t rely solely on your 1099s.
Remember, clients that paid you less than $600 don’t have to issue one — and some clients may not send one, even though they’re supposed to.
Ultimately, you’re responsible for reporting all the income you earned during the year to the IRS, whether you received a 1099 or not. This is why it’s essential to keep track of the money you earn throughout the year, independently.
Form 1040
Form 1040 is the main form you use to file your taxes. Much of the information you need to include on form 1040 will be calculated using the tax schedules below.
Schedule C or C-EZ
Typically, you’ll use Schedule C to report your income and expenses. This helps determine whether your business earned a profit or reported a loss for the year.
One of the benefits of being self-employed is that you can deduct business-related expenses to reduce your taxable income.
The tax deductions you can claim vary based on your type of business. For example, suppose you’re a contractor. In that case, you can deduct the cost of tools and equipment you need to replace siding, repair roofs or install cabinets.
If you’re a personal trainer, the fitness equipment you use to whip your clients into shape is deductible. And if you’re a consultant who works from a home office, your office furniture, computer and phone are deductible.
And remember, as we said above, you can deduct the employer portion of FICA taxes and can typically deduct any business insurance premiums you pay, no matter what type of business you run.
Tip: Learn about 16 amazing tax deductions independent contractors may qualify for. These include deductions for office expenses, car mileage, health insurance, and even hiring a certified public accountant (CPA).
Schedule SE
Schedule SE form calculates the amount you have to pay in Social Security and Medicare taxes. You’ll use the income or loss calculated on Schedule C to determine what you owe.
Even if you’re collecting Social Security and Medicare benefits, you still have to pay; this tax applies no matter how old you are.
How does an independent contractor pay taxes?
If you earned $400 or more during the year (regardless of whether you received 1099s for that work), you’ll need to file an income tax return when tax time rolls around. In some situations, you might also be required to file a tax return even if your net income was less than $400.
Here are the basic steps for paying your business taxes:
1. Gather your documents
Most 1099 independent contractors are sole proprietorships. That means that all your earnings are reported as part of your personal income.
If you’re running your business as a sole proprietorship, your default taxpayer identification number is your Social Security number. However, if you have employees and applied for an employer identification number (EIN), you would need this number to do your taxes.
You’ll want to gather all of the necessary documents for both your personal and business income together. This might include your 1099s, any W-2s, miscellaneous income and paid invoices for which you received no additional paperwork.
Remember, even if the people you work for are sloppy with their paperwork, the IRS makes it your responsibility to report all the income you make during the year. Get all this information in one place to prepare your filing.
2. Prep your records
Once you have all your income documents together, you’ll want to organize your expenses. You or a bookkeeper should be recording your transactions throughout the year, and here’s where you can put those receipts to good use.
When you have a record of your business expenses, complete with receipts or proof of transactions, you can take advantage of allowable deductions. These deductions can reduce your overall tax liability by thousands — maybe enough to get a tax refund!
That’s why it’s important to keep receipts for tax purposes — to ensure you have an accurate record of what to deduct. And if you get audited, the IRS will want to see them.
3. File taxes yourself via a tax professional
We recommend working with a licensed tax professional to ensure your taxes are filed correctly so you don't incur any penalties from the IRS. Plus, they can give you useful tax advice on your estimated taxes or setting up your accounting system.
But maybe your business taxes are pretty simple, or your business hasn’t changed much from last year. If that’s the case, you could take a crack at filing taxes yourself.
When you go this route, you can mail or submit your tax forms online. If you choose the paper route, you can download the forms from the IRS’s site. Or, check at local libraries and post offices — they often have free paper forms for taxpayers.
You can also e-file directly by creating an account on the IRS’s website. If you need to pay taxes, you can transfer funds with a bank account, debit card, credit card or digital wallet. You can also file using commercial tax preparation software, which transmits your forms through an IRS-approved electronic channel.
Filing online is the most efficient option for do-it-yourself filing. You don't have to worry about making copies of the form or lost papers, and you can easily track your payment history.
How NEXT Insurance helps 1099 independent contractors
NEXT provides fast, easy and affordable business insurance options for self-employed workers and small business owners.
Start our free instant quote online to review your options, purchase coverage and get your certificate of insurance if you need one. The entire process takes less than 10 minutes.
Our licensed, U.S.-based insurance advisors are standing by to help if you have insurance questions.
And there’s good news — your insurance expenses are usually considered a tax write-off.
