Are you one of the 59 million Americans who participate in the gig economy? You know, the hustlers who drive Uber during the day and DJ during the night in order to build a life that’s got nothing to do with the “status quo.” You are? Great. You’ll fit right in here. And, you’re not at all alone.
In fact, according to recent estimates, by 2027, there will be 86.5 million freelancers who count as independent contractors or “1099 employees.” Whether you call yourself a gig worker, freelancer, or anything else, in tax terms...you’re a 1099 employee (unless you’ve got your own registered business; that’s a whole different story).
Though self-employment has its perks, there are essential tax rules to learn and follow as an independent 1099 employee. Here’s what to know if you’re just getting started as a freelance or gig worker and are worried about how you’ll pay taxes this coming Tax Day.
What Is Form 1099?
A 1099 form is simply a record of income you earned over the course of any given tax year. While earned income from a traditional job is reported on Form W-2, self-employment income is reported on form 1099. Like checking a W-2 to see how much you earned from an employer, you review your 1099 forms to determine how much you made during the year.
W-2 vs.1099 Employee: The Basics
Businesses must provide a form 1099 to any contractor they paid $600 or more to during the tax year. They must issue any 1099s by the end of January for the previous tax year. One significant difference between being a W-2 employee and a 1099 employee is that 1099 employees pay self-employment taxes.
Self-employment taxes include Medicare and Social Security taxes. Companies don’t withhold taxes for 1099 employees the same way they do for W-2 workers. That means you are responsible for reporting and paying taxes yourself. Another thing to note: even if you earn less than $600 as an independent contractor, you are still responsible for reporting the income on your tax return.
Want a better-paying job? These are the Highest-Paying Jobs for Millennials, and most of them are ones you can do as a freelance 1099 employee if you want to.
Disputing 1099 Income
It’s crucial to report the income on every 1099 form you receive, even if you plan to dispute any of the amounts. If you don’t report 1099 income, the IRS will track you down and charge you a host of late fees and interest charges in addition to the base tax you owe.
Alternatively, disputing income on a 1099 form to the person or business that issued it to you can save you a lot of headaches down the road. Just be sure to contact them sooner rather than later so everything is all set when it’s time to file your taxes.
Need to find extra money to pay your taxes? Here is How to Quickly Build Your Emergency Savings Fund so that you can ensure you have enough cash come Tax Day to pay your freelance taxes.
Retirement Income for Independent Contractors
Self-employed people have options to save for retirement. The only difference is that they're not eligible for a traditional 401k through an employer. While W-2 workers can contribute to a 401(k), they face a cap on that contribution. As of 2021, that limit is $19,500, or $26,000 if you are 50 years of age or older.
A solo or self-employment 401(k) allows independent contractors to contribute the limit of 19,500 plus a 20% profit sharing contribution if they have a single-member LLC. They could even contribute 25% as a C-corp or S-corporation. These options allow for sizable retirement benefits and are a key advantage to being a 1099 employee versus a W-2 worker.
Interested in learning more about retirement accounts? Read more about Traditional 401(k) vs. Roth 401(k)s.
How To Pay Your Taxes As a 1099 Employee
A common recommendation for 1099 employee tax payments is to meet the quarterly requirements on January 15th, April 15th, June 15th, and September 15th. 20% is advisable to set aside for payment to the IRS. 15.3% self-employment tax applies, and you should earmark a portion for state and municipal taxes. Get to know your state tax rate and set funds aside to cover this.
The IRS will also receive a copy of a 1099 so it is always best to cover your estimated tax obligations. Meeting with a professional tax consultant can help you save time and money. Interest on late tax payments to the IRS can create a tremendous burden on independent contractors.
Looking for a list of tax deductions that you can use as a freelancer? Check out our guide to Tax Deductions for Freelancers so that you can reduce your taxable income in 2022.
Be Your Own Boss & Invest in Yourself
Being your own boss comes with valuable benefits and advantages. It also comes with its own set of responsibilities such as reporting all of your 1099 income and paying estimated quarterly taxes to the IRS. Additionally, it’s important to research any tax deductions that might be available to you as a 1099 employee.
Want to learn more about how to succeed as a freelancer or gig worker? Download the Wealth Stack app to access over 100 free financial courses to help you manage your money like a pro. You’ve got the hustle. We’ve got the knowledge. Now, let’s work together to build something great.