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What Are the Tax Implications of Being a 1099 Contractor?

Tricia Christensen
Tricia Christensen
Tricia Christensen
Tricia Christensen

A 1099 contractor, also known as an independent contractor, is a classification assigned to certain U.S. workers. The "1099" reference identifies the tax form that businesses must file with the Internal Revenue Service (IRS), and it relieves the employer from the responsibility of withholding taxes from the individual's paychecks. Although independent contractors provide a service to an organization, they are not considered employees of the company. This shifts the burden of ensuring that income taxes are paid each year from the employer to the workers, provided that these individuals earn at least $600 US Dollars (USD) per year and are U.S. residents or citizens.

Which Taxes Must Be Paid?

2012 1099-misc form.
2012 1099-misc form.

As an independent contractor, an individual is basically self-employed. In addition to any state and federal income taxes, people who earn at least $400 US Dollars (USD) each year must pay self-employment taxes to help finance Social Security for retirement and Medicare for health-related benefits. The charge for these taxes varies, depending on person's income, but it's usually a percentage of what he or she earns.

How and When Are Taxes Paid?

W-9 form, a type of tax form filed for freelance and contract employees.
W-9 form, a type of tax form filed for freelance and contract employees.

Considering that federal and state income taxes aren't automatically being deducted each pay period, the contractor must decide how to satisfy his tax obligation. In most cases, the person is required to make quarterly estimated payments based on the previous year's income to the IRS to avoid being hit with penalties and a high tax liability each year. To make the most of the tax money, an individual might take a portion of this amount out of his or her pay each month and deposit the money into a savings account until the taxes are due, allowing him or her to earn interest on the funds.

The 1099 is an IRS form that an independent contractor receives stating her income from a given business during a given tax year.
The 1099 is an IRS form that an independent contractor receives stating her income from a given business during a given tax year.

Quarterly estimated tax payments are typically due on 15 April, 15 June, 15 September, and 15 January of the following year. As with those who earn income as an employee, people who are self-employed must file their taxes and pay any additional money due by 15 April of the year after the money was earned.

If an independent contractor is one of the individuals filing a joint tax return — especially if the other individual is a full-time employee of a company — the couple could handle payments a little differently. If the person who is filing as an employee has overpaid his or her taxes throughout the year, that money, which would normally be returned as a tax refund, might instead need to be applied to any amount owed by the 1099 contractor. Some couples have actually worked this to their advantage, with the regular employee dropping his or her deductions so that a larger amount of tax is withheld than would normally be correct. The overpayment is then applied to the freelancer’s tax obligations.

What Are the Pros and Cons?

Electricians may work as 1099 contractors.
Electricians may work as 1099 contractors.

To offset some of the tax expense, someone who is self-employed can often take advantage of certain deductions that aren't necessarily available to the average employee. For instance, he may be able to write off a home office that's used exclusively for work, business supplies, and traveling expenses, in addition to work-related lunches, when appropriate. Doing this, though, typically means many more forms to file at the end of each tax year.

It's important that the individual be able to accurately document all of these expenses. Because some of these deductions are pretty easy to falsify — a home office is supposed to be used exclusively for business purposes, for example — people who file certain tax forms are more likely to be audited than others. Filling out all tax forms honestly and keeping good, accurate records is the best way for people to be prepared should the IRS ask questions.

In addition, there are some taxes that a 1099 contractor isn't required to pay. Most importantly, these workers aren't required to pay unemployment taxes, which are taxes paid by an employer on behalf of its employees, and are not deducted from the employees' paychecks. Since contractors aren't employees, they don't pay this money, which seems like a benefit that would puts more cash in the individual's pocket. This also means, however, that the individual is not entitled to collect unemployment benefits if he or she loses a contract or cannot find work.

What Type of Employee Receives a 1099?

Independent contractors receive a 1099 form every year for tax purposes. Employees of a company receive a W-4 form instead. When independent contractors earn more than $400 in a given year, they’re required to file an income tax return for that year.

Independent contractors are their own entity — they run their own business. For example, they can be a sole proprietorship, an LLC or another form of business. They’re self-employed and contract their services with companies for specific work to be done. They may have both short-term and long-term contracts with different companies, and they can work for many companies at a time.

Employers pay half of employees’ Medicare and Social Security taxes. Employees may also have benefits packages that include health insurance, health savings accounts and retirement vehicles such as IRAs and 401(k)s.

Independent contractors receive the payment they contracted for, with no taxes withheld. They are responsible for paying their own state and federal income tax and self-employment tax, which includes the entirety of their Medicare tax and Social Security tax.

The tax rate for self-employment is 15.3% on an income of up to $147,000 as of March 8, 2022, and includes 2.9% for Medicare and 12.4% for Social Security. Independent contractors are also responsible for obtaining any benefits on their own, including health insurance and retirement accounts.

Another major difference between employees and independent contractors is the level of autonomy they have. Employees are hired to work on specific projects under the auspices of a manager. Independent contractors are given a task to do, which they can do in their own way, in their own time.

Do 1099 Employees Pay More Taxes?

Independent contractors who receive a 1099 pay a little more in taxes, due to the self-employment tax, which covers the entirety of their Medicare and Social Security taxes. Aside from that, they pay the same federal and state income taxes as regular employees..

It may feel like you’re paying more taxes as an independent contractor, since you’re paying everything in a lump sum either quarterly or annually. However, besides the self-employment tax, you’re truly paying the same amount in taxes.

There is an upside: independent contractors can deduct business expenses on their Schedule C form. Business expenses can add up quickly, including:

  • A portion of your rent or mortgage
  • Part of your utility bills
  • Office supplies such as highlighters, pens, printer ink and paper
  • Office equipment such as your computer, tablet, phone or printer
  • Organizational memberships such as the Chamber of Commerce or Business Networking International (BNI)
  • Business dinners or lunches with current or potential clients
  • Health insurance costs
  • Tax preparation software

How Much Should I Set Aside for Taxes?

How much you should set aside can depend on a variety of factors, including what tax bracket your income puts you in and how many deductions you have on your Schedule C form. Keep in mind, you only pay taxes on your net profit, not on your total business income. That’s why it’s crucial that you keep track of deductions throughout the year.

If you anticipate owing $1,000 or more as an independent contractor at tax time, the IRS requires you to make quarterly estimated tax payments. Quarterly payments must be paid by the 15th of April, June, September and January. If you pay your quarterly payments late, the IRS may impose penalties. Making quarterly payments doesn’t excuse you from filing a tax return by April 15th.

A good rule of thumb is to set aside 25% to 30% of your income to pay your quarterly income taxes. Set up a savings account and any time money hits your checking account, have it set up so that at least 25% of the funds are transferred immediately to your savings account. This lets you earn interest on your savings.

Tricia Christensen
Tricia Christensen

Tricia has a Literature degree from Sonoma State University and has been a frequent SmartCapitalMind contributor for many years. She is especially passionate about reading and writing, although her other interests include medicine, art, film, history, politics, ethics, and religion. Tricia lives in Northern California and is currently working on her first novel.

Learn more...
Tricia Christensen
Tricia Christensen

Tricia has a Literature degree from Sonoma State University and has been a frequent SmartCapitalMind contributor for many years. She is especially passionate about reading and writing, although her other interests include medicine, art, film, history, politics, ethics, and religion. Tricia lives in Northern California and is currently working on her first novel.

Learn more...

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Discussion Comments

anon929823

If I am a 1099 contractor for three months and a W2 for the rest of the year, should I still pay estimated taxes?

anon927338

I was chosen to create some invitation design, mailer, ticket etc.. for a profit organization, but was only officially paid twice by them, within different time frames within the same year. I didn't sign a contract with them; in fact, they had to sign one of mine. Seeing that I am freelance, I am not by contract or work for hire. It was an independent outreach by their organizer.

Now they are contacting me to fill out a 1099 for them. I am very unsure, and do not want to give out my social or any information to these people, seeing that I don't know if it is trustworthy. Am I required to do this even though it was only a temporary design for them?

anon926165

Taxes are required after $400 of income in a calendar year through an independent contractor filing a 1099.

anon355201

If you work 1099, then remember you can put money into your own 401K plan. Not limited like the normal IRA contribution. This 401K contribution means you won't pay taxes on that money ($17,500 this year + extra approx $6,000 if over 50), but of course you don't get a match. Vanguard has one for self-employed folks, with no fee (or maybe $20). Some day you will be old and will really appreciate the money you put away!

anon338087

We are about to hire a person to help do remedial work on an electrical job. We only need this person for about four to six weeks. A person approached us and told us they would work on a 1099. Is this possible? And what paperwork do I need to hire this subcontractor?

anon325695

If you work as a contractor part time 1099 and your income was about 6000, will you be responsible for a large tax due? This does not count any expenses for traveling or tools.

anon320127

I have been a 1099 independent contractor for 15 years as a caregiver to an old lady. She is my employer. I voluntarily agreed to be a 1099 contractor. Now her trustee, who is her niece, is forcing me to change from a 1099 to a w2. My question is, can I decline and keep the 1099?

anon303930

I was offered a 1099 contractor job for a three year IT project. They offered $50 per hour. I didn't realize I have to pay everything from my pay. I will be making over 100k. What percentage of money goes to taxes including social security and medicare? I don't think I can accept the job.

anon301707

How much money can someone make before a 1099 is required?

kylee07drg

If you are a 1099 independent contractor, do you have to pay quarterly estimated taxes, or can you wait until April 15 if you choose? I have some weeks where I make almost no money, so I would hate to wind up paying more in estimated taxes for one quarter than I actually owe. I might not be able to afford this.

StarJo

@shell4life – I hold a 1099 contractor job, and last year, I discovered at tax time that I had not been putting aside enough of my payments. I had been putting 20% of each check in a savings account, but I ended up owing about 26%.

Luckily, my husband was getting a refund of $1500, so that helped cover the portion that I didn't set aside. This year, I've been calculating 26% of each paycheck, and I always round it up to the nearest dollar. I'm hoping that we might be able to use his refund this time for something other than paying my taxes, and if all goes as planned, we should.

shell4life

I do freelance work for two different companies, and next year will be my first time filing my taxes with a 1099. Is there a certain percentage of each check that I should be putting aside? What is the best way to keep track of how much I will owe in taxes?

wavy58

There are a few things other than unemployment that I got out of paying as a 1099 contractor. At my old job, my employer would always deduct a certain percentage of my check for something called “cafeteria.” This was a little mysterious, and I don't think anyone in the office actually knew exactly what it was.

Also, I had a 401(k) plan at my old job, and I don't have that money deducted from my check anymore. My husband put me on his insurance plan once I quit and became an independent contractor, so I don't have to spend a fortune on my own insurance.

laclark

I have a small business. My daughter works for me about 10 hours a week. I pay her about $100 a week. Do I need to do a 1099?

anon198849

I'm a first-time 1099 contractor on a three to four month contract in GA. What are the filing requirements for the state? Do they follow the same schedule as the Feds?

anon152959

I just finished my taxes and I am showing a $800 for LLC Taxes LLC Tax Voucher Form 3522 and Form 568 shows $800.

anon128120

Who is liable if the person receiving a 1099 does not pay their taxes? Does it fall back on the employer?

anon81174

I work for a small flooring company and jobs have been a little slim. The owner is not really all that good at running it, and there seems to be too much personal overhead. Anyway, he wants us, the three employees, to get our own license so he can pay us under 1099 and him not have to pay anything. What do we do?

anon69780

what do you do when you were not a private contractor and you should be getting a w2 instead of a 1099 but the employer is being a jerk? Does anyone know?

anon67812

Taxes are a major pain in the butt. does not the American government promote capitalism? Or are they trying in every way possible to limit the way you run your own stinking business?

With so many damn tax liabilities and forms to fill out, who the hell can start a company without all the crazy fees? Taxation of the people as in individual is to be expected, but taxing a business only deters economic growth!

anon63771

is there a max amount of money you can claim on your 1099?

anon63742

$600

anon63455

What is the answer? How much money before you issue a 1099?

anon62535

what is the amount one can earn before a 1099 is required?

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    • 2012 1099-misc form.
      2012 1099-misc form.
    • W-9 form, a type of tax form filed for freelance and contract employees.
      W-9 form, a type of tax form filed for freelance and contract employees.
    • The 1099 is an IRS form that an independent contractor receives stating her income from a given business during a given tax year.
      By: michaeljung
      The 1099 is an IRS form that an independent contractor receives stating her income from a given business during a given tax year.
    • Electricians may work as 1099 contractors.
      By: auremar
      Electricians may work as 1099 contractors.