1099 Taxes: What Independent Contractors Need to Know

Nobody withholds tax from a 1099 payment, so the whole bill arrives at once unless you plan for it. Here is what makes up that bill and how to work out your own share.

What is 1099 income?

1099 income is money you were paid for work done as a contractor rather than an employee. The form is just the paperwork: a client who paid you $600 or more sends a 1099-NEC, and a payment platform may send a 1099-K. The tax treatment does not depend on the form arriving. Cash jobs, direct invoices and marketplace sales are all self-employment income, whether or not anything shows up in the post.

The practical difference from a W-2 job is that nothing has been taken out. A paycheque arrives with income tax, social security and Medicare already gone. A 1099 payment arrives whole, and the tax on it is still yours to pay.

How 1099 taxes work

There are two separate federal taxes on the same money, and mixing them up is where most surprises come from.

  • Self-employment tax covers social security and Medicare. It is charged on your business profit, at a flat set of rates, and it applies even to people whose income is too low to owe any income tax.
  • Federal income tax is the one everybody knows, charged on your taxable income at rates that step up through brackets.

Both are worked out on your profit, not on what clients paid you. Your expenses come off first, and the order matters:

what clients paid you − business expenses = net profit → self-employment tax and income tax are both built on that profit

Depending on where you live, a state income tax may sit on top. A handful of states have none at all.

Self-employment tax

An employee and their employer split social security and Medicare between them. Working for yourself, you are both, which is why the combined rate is 15.3% — 12.4% for social security and 2.9% for Medicare.

It is not 15.3% of everything, though, and three rules soften it:

  • Only 92.35% of your net profit counts as net earnings from self-employment, so the effective rate on profit is nearer 14.1%.
  • The 12.4% social security part stops at a wage base that rises each year. Above it, only the 2.9% Medicare part continues.
  • Half of the self-employment tax you pay is deducted when working out your income tax, which claws some of it back.

Below $400 of net earnings there is no self-employment tax at all. Well above the wage base, an extra 0.9% Medicare tax applies to the income over a threshold set by filing status.

Federal income tax

Income tax starts from a smaller number than people expect. From your profit you subtract half the self-employment tax, then the standard deduction for your filing status. What is left is taxable income, and it is taxed a slice at a time: the first slice at 10%, the next at 12%, and so on. Landing in the 22% bracket does not mean 22% of everything — only the part inside that band pays 22%.

This is why two people with the same 1099 income can owe very different amounts. Filing status, a spouse's income and any other taxable income all move where those slices fall.

Business deductions

Every dollar of legitimate expense cuts both taxes at once, which makes tracking them the highest-return admin work you can do. The test is that a cost is ordinary and necessary for your line of work.

  • Supplies, materials and equipment
  • Software, subscriptions and professional fees
  • Advertising, website and payment processing fees
  • Business mileage, or the business share of vehicle costs
  • Business insurance, licences and continuing education
  • The business share of your phone and internet
  • A home office, when the space is used regularly and only for business — the simplified method is $5 per square foot up to 300 square feet

Keep the receipts and keep business and personal spending apart. A separate bank account for the business is the single change that makes this painless at year end.

Estimated quarterly taxes

The US tax system is pay-as-you-go. An employee satisfies that through withholding; someone self-employed usually does it by sending payments during the year instead. Whether you need to, and how much, depends on how much you will owe, what has already been withheld somewhere else, and what you paid last year — so it is not a universal rule that every 1099 worker must file quarterly.

The IRS sets out the tests, the due dates and the payment methods in Estimated taxes and in Form 1040-ES. If it turns out you do need to pay, the practical move is to put a percentage of every payment aside as it arrives rather than finding the money four times a year.

How to estimate take-home pay

Work through it in the same order the IRS does:

  1. Add up everything you were paid for self-employed work.
  2. Subtract your deductible expenses. That is your net profit.
  3. Take 92.35% of the profit, then 15.3% of that, for self-employment tax — remembering the social security part stops at the wage base.
  4. Subtract half of that tax, and the standard deduction, from your profit. Run what remains through the brackets for your filing status.
  5. Add any state income tax.
  6. Profit minus those taxes is what you keep.

The 1099 tax calculator does exactly this with the published figures for the tax year you choose, and shows every line.

Common 1099 tax mistakes

Setting aside a percentage of revenue instead of profit
Tax is charged on profit. Saving 30% of every payment is safe but heavy; saving nothing until April is worse.
Forgetting self-employment tax exists
People budget for income tax, see that the standard deduction covers most of their income, and are then billed for social security and Medicare anyway.
Treating the 1099 as the complete record
Income without a form is still income, and a 1099-K can report gross payments before platform fees — fees you then have to deduct yourself.
Not tracking small expenses
Mileage, software and fees add up to real money, and they cut both taxes.
Pricing as though the rate were a salary
$60 an hour as a contractor is not $60 an hour as an employee: it is that, minus both halves of payroll tax, minus unpaid admin time, minus the benefits nobody is providing. The pricing calculator is the other half of this problem.
Mixing business and personal accounts
It turns a two-hour year-end job into a two-day one, and it makes deductions harder to defend.

Frequently asked questions

Do I have to pay taxes on 1099 income under $600?

Yes. The $600 figure is the point at which a client must send you a 1099-NEC, not the point at which income becomes taxable. Self-employment tax has its own separate floor: below $400 of net earnings, that tax does not apply, though the income can still count for income tax.

Is 1099 income taxed more heavily than W-2 income?

On the same gross figure, usually yes, because you pay both halves of social security and Medicare rather than one. Deductions work in the other direction: a contractor can subtract business costs that an employee cannot.

Can I write off my car or my home?

Partly, and only the business share. Mileage for work travel is deductible at the standard rate; commuting is not. A home office must be a space used regularly and only for business — the kitchen table does not qualify.

What happens if I do not pay during the year?

The tax is still owed at filing, and the IRS may add a penalty for underpaying through the year. The rules, including the safe-harbour tests that avoid the penalty, are in the IRS estimated taxes guidance.

Does this guide replace an accountant?

No. It explains how the pieces fit together so the numbers stop being a mystery. Anything unusual — multiple states, an S-corp election, employees, large equipment purchases — is worth an hour of a professional's time.

Last updated . Everything here is general information, not tax advice.