So, you’re your own boss. You get to make your own schedule, call your own shots, and determine what you’ll take on. Whether you call yourself a business owner, independent consultant, freelancer, or gig economy worker, you will probably receive a 1099 form. If you are thinking, "what is a 1099 form?" well, it just means that Uncle Sam classifies you as a self-employed worker. That means you’ll be responsible for figuring out how much tax you owe and making plans to pay your taxes. Luckily, you’re here reading this so you’ll be ahead of the game and taxes won’t be a scary afterthought.
Let’s get right down to it! How much tax do you pay on 1099 income and what that means for your wallet?
When you receive 1099 income you can expect to pay federal, state, and local tax the same as you would if you were working for an employer. Starting with the Feds, you can expect to pay 15.3% in self-employment tax.
It sounds brand new but if you’ve had a job that provided you with a W-2 before you’re not completely unfamiliar. It’s the portion of your 1099 income set aside for Social Security and Medicare. Typically, the employer pays half and the employee pays half. Since you're running the whole show, you contribute the whole shabang.
On the bright side, you do get a deduction for 50% of the self-employment tax you’re responsible to pay. It isn’t the same as getting your money back but it does reduce your taxable income and amounts paid serve as contributions to your retirement and future health care. You should be proud, it costs to be the boss and you’re paying!
Like all wage earners, you’ll also have to consider your portion of tax due based on your income. This portion is variable because there are levels which are known as tax brackets. For each dollar that you earn, you’ll owe a percentage of that dollar in tax. Tax bracket tables are pretty good at showing marginal tax rates but sometimes there’s a little calculating that needs to be done to correctly apply those rates to your tax situation.
Next, there are taxes you’ll pay depending on the state and city where you live in or where your business was established. A handful of states have no personal income tax while California has the highest personal income tax at 13.3%.
For most 1099 workers, planning to pay approximately 7% each for both state and local tax should put you in the safe zone from any looming penalties and subsequent interest from underpayment.
So far, we’ve covered self-employment tax, federal income tax, and state and local tax. For every dollar you earn as a 1099 worker, you can expect to keep 70 cents for yourself and to pay your fair share of about 30 cents in tax.
Keeper has a self-employed tax calculator to quickly estimate how much taxes you'll owe.
Although it seems that when you are an independent contractor, you’re paying more in tax than W-2 wage earners per dollar earned, consider that for each taxpayer the amount contributed is that individual’s fair share. That’s why keeping records of the various business costs incurred throughout the year with a 1099 expense tracker app is so important. There may be credits and deductions specific to your situation that reduce your taxable income.
W-2 employees don’t have to worry about deducting business expenses from their net income but as a self-employed taxpayer keeping track of the money you spend could mean less tax you have to pay on your 1099 income.
There are lots of things you probably already pay for that allow you to run your business and they can represent tax deductions. Supplies, equipment, internet, cell phone service, and software are just a few of the things that could be deductible and impact how much tax you pay as a 1099 worker. Managing receipts and tracking expenses throughout the year can save a lot of time and frustration at tax time.
Check out our guide for handling taxes for independent contractors.
Since being a 1099 worker means there aren’t any automatic withholdings taken from your income, you may be wondering how to pay the amount you owe and when do you pay it. This is where estimated taxes come in. Since the U.S runs on a pay as you go tax system, estimated tax allows you to do just that. You pay the government what you think you’ll owe based on the amount you earn. Paying estimated tax allows you to meet your tax liability throughout the year while avoiding a large tax bill due at once or even penalties and interest later.
If you expect to owe $1000 or more in tax, you would be expected to make estimated payments. Let’s say last year was your first year freelancing and you ended up owing $1,673 in federal income tax. Also, you expect to earn more this year than you did last year and determine you’re likely to owe $2200 in federal income tax. You would divide that amount by 4 and you’d arrive at $550 in tax owed per quarter. Below are the established dates when quarterly payments are expected to be made.
Jan 1 - Mar 31 / Apr 15
Apr 1 - Jun 30 / Jul 15
Jul 1 - Aug 31 / Sep 15
Sep 1 - Dec 31 / Jan 15
Use Keeper Tax's handy dandy quarterly tax calculator to estimate how much you should be making in payments.
When it comes to paying your federal estimated tax, you have options.
By Mail - Use Form 1040-ES
App - IRS2goapp
Online - Use IRS Direct Pay or EFTPS
IRS Direct Pay allows you to pay tax online using your social security number and identifying information from a prior-year tax return. You can make payments up to 30 days ahead of time using this method.
EFTPS (Electronic Federal Tax Payment System) is available to both businesses and individuals to make tax payments. The beauty of this option is that you can schedule payments up to 365 days in advance. Even though estimated payments are only due on a quarterly basis there’s nothing stopping you from paying monthly if you think you may be tempted to buy a nice tv or book a quick trip using the money piling up in your tax savings account. This system would allow you to schedule payments so you can set it and forget it.
Keep in mind that this is generalized tax information. Your individual tax situation may be uniquely complex so it’s recommended you work with your tax professional.
Keeper finds tax deductible expenses among your purchases ... automatically! Save $1000s a year claiming the tax write offs you’re eligible for as a contractor.