In 2017, almost 7% of U.S. employment was based on an independent contractor agreement. That represents an enormous amount of our economy, and these workers are filing 1099 taxes.
What’s an independent contractor? If you do work for pay without having taxes withheld, you’re probably a contractor.
You may control your schedule and be able to work from anywhere – these are common perks. However, you also probably don’t have benefits and have to pay additional self-employment taxes.
Contract work is a lucrative side-hustle for millions of Americans, and others use independent contracting as their full income. When it comes to tax time, however, filing can be a challenge.
Here’s what you need to know about filing taxes as an independent contractor!
Know the Threshold
Do you have to report your taxes if they came from non-employment work? The answer is yes – if you earned $400 or more total in 1099 income during the year.
Clients have to issue you a 1099 form if they pay you over $600 in a year. The filing threshold is lower and is a total from all independent contract work you’ve done for all clients.
As a result, even if you don’t receive a physical 1099 from your clients you may still have to file 1099 taxes.
You have to file 1099 taxes if you exceed the threshold even if you have a regular W-2 job. The good news is that your W-2 withholding will help offset the taxes you owe, especially if your independent contract income is small.
Take All the Deductions You Can
One great thing about being an independent contractor is that you can take a lot of deductions to offset your income. This means you have to itemize your tax return, which makes it more complicated than if you were filing based on a regular W-2 job alone.
However, the results can be very worthwhile. The deductions help reduce the amount of your income that is subject to self-employment and other taxes, which can save you a lot of money.
Any expense that you incur as a normal part of doing your independent contract work. You record the expenses on the IRS Schedule C form.
Here are some deductions to consider:
- Home office deductions if you have a dedicated office in your home
- Gasoline and mileage if you use your car for your work
- Software and computer expenses
- A percentage of your internet costs
- The cost of travel to business conferences
- The cost of training programs or coaching you buy to advance your career
Itemizing your return and taking the appropriate deductions can be a big challenge, and it’s easy to make a mistake. If you’re filing taxes with a 1099, you may want to hire a professional. This company may be able to help.
Consider Estimated Tax Payments
If your independent contract work is a significant part of your income, you will want to look into paying estimated tax payments. These are payments you send to the IRS each quarter to help offset how much you owe in April.
Whether or not you owe estimated tax payments depends on how much you earn from your independent contract work and whether or not you (or your spouse) has a regular W-2 job as well.
If you want to determine your estimated payments yourself, you can use IRS form 1040-ES. Most of the time, though, you’ll want a professional CPA to help with this aspect of trying to pay 1099 taxes.
Budgeting for these tax payments can be really hard if your income is inconsistent or you struggle to save money. Fortunately, these tips can help you find ways to set money aside so you can afford your taxes.
Expect to Owe Money
For most W-2 full-time employees, tax time is an event they look forward to. After all, many of them get a large tax refund and plan ways to spend this apparent windfall.
This refund comes from the fact that they’ve had taxes withheld all year and actually paid more tax than they owed. This rarely happens with a 1099 misc filing.
Unless you or a spouse also have a W-2 job or you’ve paid quarterly taxes throughout the year, you should expect to owe on your taxes. After all, you haven’t had any taxes withheld all year, unlike full-time workers. Also, without an employer to pay part of your Medicare and social security taxes, you owe a bit more.
Because you’re looking at a year’s worth of taxes at once, the bill can feel quite large. Consider setting aside a specific portion of your income each month. Use this money as quarterly IRS payments or save it up for your tax bill in April.
Tax time doesn’t have to be a nightmare if you save and prepare throughout the year!
Be Ready for 1099 Taxes This Year
Now that you know how to pay 1099 taxes, you’ll be better prepared for tax season this year. If you earn more than $400 in total independent income in a year, you need to file 1099 taxes.
1099 taxes are unique because you don’t have taxes withheld from your income throughout the year. Also, you have to pay an extra self-employment tax because you don’t have an employer to cover part of your social security and Medicare taxes.
Fortunately, the tax burden can be a lot lighter if you itemize your deductions on a Schedule C. These write-offs help you avoid paying more than you owe.
Interested in learning more about how to be successful with your finances? Take a look at our other financial articles today!