A 1099 Worker's Guide to Tax Savings
How to save for taxes as an independent contractor.
Working for yourself offers plenty of benefits, including independence, a mix of projects and total control of the office thermometer. And in the age of side hustling, more people are taking on flexible contract work every year.
But working for yourself has its headaches, too, and many of them come during tax season. “What kind of worker am I?” “Do I need to pay taxes quarterly or annually?” “How much should I pay in taxes?” These and other questions can be challenging for new freelancers. The following tips will answer these and other questions so you can dive into new projects with fewer worries.
What is 1099 income?
Freelancer. Independent contractor. Self-employed. 1099 worker. Side hustler. There are many terms used to define workers who are not traditional employees. Regardless of the label, they are treated the same when it comes to taxes.
First things first: When you work for yourself, your employer does not withhold taxes from your paycheck and send them to the IRS. Instead, you’re expected to pay income taxes directly to the government.
Like most things related to taxes, it all starts with paperwork. Instead of a traditional W-2, as a contractor you fill out a W-9. That allows the company that hired you to prove to the IRS that it doesn’t owe payroll tax for your employment. Then, come tax season, you will receive an IRS form 1099 from each client, outlining exactly how much 1099 income you earned from that company over the course of the year.1
How much tax will I owe?
The first step to avoid headaches is determining what percentage of your income should be saved to pay your taxes. To figure out how to calculate tax on 1099 income, you’ll first need to predict what tax bracket you'll fall into, based on how much money you think you'll make for the year.
At the start of the calendar year, use a reliable source like the Tax Foundation to find income tax brackets for federal, state and city taxes.2 If you can project your total income for the year, you’ll be able to predict which tax bracket you will fall into—that is, what percentage of your income is owed to the IRS. Once you know about how much you’ll earn, you can figure out what percentage of your income you should save.
When are taxes due?
Most taxpayers think of tax season as something that happens yearly, like the Super Bowl, only with fewer car commercials. But for many contractors, tax season comes quarterly. If you typically pay more than $1,000 in taxes each year, you may need to switch to a quarterly schedule. If you expect to pay less than $1,000 in taxes, doing taxes once a year should work just fine for you.
In general, if you think you're going to come close to this $1,000 threshold, it can make life with the IRS easier if you pay quarterly. If you’re not sure, you can consult the IRS's estimated tax guide, or talk to a tax adviser.3
What expenses can I deduct?
Yes, working for yourself might mean flexibility and freedom. But that freedom comes with a price tag. As a contractor, you’re responsible for most of the expenses that might be paid for in a traditional workplace, including office supplies, printing, mileage expenses and meals with clients.
So before you start putting away money for the IRS, it could be a good idea to take stock of all the money you spend to keep your business running smoothly. Then check the IRS’s guide to deducting business expenses.4 Every dollar you spend on your business is a dollar you can subtract from your income, reducing what you owe to the IRS.
How should I save for taxes?
Once you have a sense of how much you will owe, you’ll need a plan for saving that money for taxes.
If you already have a savings account, you can use it to set aside the money you expect to owe in taxes at the end of the quarter or year. If not, you might consider opening a savings account to keep the money you’re saving for taxes and other long-term goals separate from your everyday spending money. Earmarking money for the IRS is one of the many advantages of a savings account.
With any luck, you’ll discover come April that you’ve overpaid on your taxes. In that case, you could keep the money in savings for a future tax payment. If you build up enough savings, you may even consider opening a money market account or CD, which come with certain restrictions but earn more interest than a traditional savings account.
Paying taxes is often a stressful part of self-employment, but it doesn't have to be. With some planning and saving, tax season offers a chance to get organized, save some money and maybe even reward yourself for cranking out so much great work.
This site is for educational purposes. The material provided on this site is not intended to provide legal, investment, or financial advice or to indicate the availability or suitability of any Capital One product or service to your unique circumstances. For specific advice about your unique circumstances, you may wish to consult a qualified professional.
This should not be construed as tax advice. You should always confer with your accountant or financial consultant before making a decision about taxes for yourself.
- Self-Employed Individuals Tax Center (n.d.). Retrieved on December 21, 2017, from: https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center#SelfEmployed
- Tax Foundation (November 10, 2016). Retrieved on December 21, 2017, from: https://taxfoundation.org/2018-tax-brackets
- Estimated Tax Guide (November 21, 2017). Retrieved on January 9, 2018, from: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes
- IRS Deductible Business Expenses (November 14, 2017). Retrieved on December 21, 2017, from: https://www.irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses