Setting your own schedule and choosing to take on only the projects you want to may sound like a dream. And if it’s done right, it can be.
There can be ambiguity when you’re starting out fresh, though — with 1099s at the center of that mystery. In this guide, you’ll learn what a 1099 employee is, its affect on how you work and how to handle the often-dreaded tax filings associated with it.
A 1099 employee is a worker that’s classified by an employer as an independent contractor — sometimes called freelancers, contractors or the self-employed.
However, there’s no clear definition for “1099 employee.” The 1099 refers to the IRS Form 1099-NEC that you may receive as an independent contractor for “nonemployee compensation.” Along with IRS Form 1099-MISC, these forms report to the IRS the taxable income you’ve earned as a nonemployee.
Independent contractors are different from those who are classified as employees in that you’re providing your services to the client, but the way you’re providing them is completely up to you. Independent contractors typically sign an agreement or contract that includes your working terms, but you may not have the same legal rights as an employee — including minimum and overtime wages.
Independent contractors and self-employed workers in an independent trade or profession, including:
Finder data suggests that women aged 25-34 are most likely to be researching this topic.
| Response | Male (%) | Female (%) |
|---|---|---|
| 65+ | 4.74% | 3.27% |
| 55-64 | 6.45% | 6.25% |
| 45-54 | 9.21% | 8.68% |
| 35-44 | 11.64% | 10.98% |
| 25-34 | 11.74% | 11.78% |
| 18-24 | 7.96% | 7.30% |
Businesses in the US are required by the IRS to classify workers as either employees or independent contractors. The right classification depends on the overall picture of how somebody performs their work.
Samantha Hawrylack, personal finance expert and cofounder of How To FIRE, offers additional insight: “Some key differences between a 1099 and a W2 employee are how they’re paid, the use of their own tools and equipment, benefits and insurance, length of time they’re set to be employed, and control over how work is completed and their schedule.” She adds, “1099 employees tend to have control over how the job is completed in regard to when and how they work, offering flexible schedules.”
The IRS encourages employers to consider three main categories when determining whether a worker is an independent contractor:
Every state has its own way of classifying independent contractors. Many use the ABC test to determine if an employee is an independent contractor:
What to do if you think you’re misclassified
If you think your client is misclassifying your employee status — say, you’re acting more as an employee than an independent contractor — start by speaking with the company or employer about your relationship and whether a W-2 classification can better serve the relationship.
If your client isn’t receptive to the conversation, you can get the IRS involved by filing IRS Form SS-8 — Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding to request a determination.
This form offers a series of questions on your working relationship and how you’re treated by the client. The IRS will consider these details and reach out to your client or employer on your behalf before making an official decision on your worker classification. This decision may not be enough for the company to change your classification, unfortunately: It is not legally binding, which means the company may end up closing your contract and moving on without a satisfying resolution.
Yes, you’re responsible for paying your own taxes. Your client won’t withhold federal or state taxes like they will for W-2 employees.
If your pay is $600 or more, you should receive Form 1099-MISC or 1099-NEC to report your income to the IRS from your client. Use the form to calculate your gross income on Schedule C.
Outside of the 1099-MISC, you may need to file your estimated taxes quarterly if you’ll pay more than $1,000 in taxes for the fiscal year.
All 1099 employees pay a 15.3% self-employment tax in two parts:
Your clients aren’t required to withhold these taxes from your paycheck, and so you must budget or set aside money to cover these costs.
Go to the IRS’s Self Employed Tax Center to learn more about taxes as a 1099 employee. A tax professional or financial advisor can help you understand whether you owe taxes or should file a 1099-MISC.
The 1099 form is what the IRS refers to as an “information return.” It’s a record that proves an company or entity other than your employer paid you money. For example, you may get one if your bank paid you interest or you earned income as a contract or freelance worker. Generally, the entity that paid you is responsible for sending a copy of your 1099 form to you in the mail.
The form is actually a series of documents that fit various reasons for your payments.
The two most common 1099 forms are the 1099-NEC and the 1099-MISC, which report nonemployee compensation. Other 1099 forms cover payments by way of bank dividends, real estate transactions and insurance payouts:
Independent contractors may be eligible for deductions for business expenses, including:
Talk with a tax or financial professional to learn about deductions or credits that can help minimize the taxes you owe.
To budget for taxes owed as a self-employed worker, you’ll need to consider how much freelance income you expect to make.
Thomas J. Brock, a certified public accountant and certified financial analyst for Annuity, unravels two approaches to budgeting for self-employment taxes: “If you’re intent on maintaining a simplified approach, you could set aside 30% of your income for taxes. This approach is very conservative, but it guards against any unexpected cash flow surprises.”
Thirty percent may sound like a huge chunk of change, but you’re not only paying income tax. As a freelancer, you’re also responsible for self-employment tax, which covers Medicare and Social Security.
Brock advises, “The most comprehensive way for a self-employed professional to estimate his or her tax obligation is to use IRS Form 1040-ES.”
Brock adds that this can be cumbersome, so if you’re going at it alone, follow four steps:
Depending on your self-employment income, you may need to send this budgeted money to the IRS every three months in the form of quarterly estimated payments. Doing so allows you to pay your taxes as you go, just as your employer would if you had a W-2 job. If you file your taxes at the end of the tax year and find out that you overpaid, you’ll get a refund.
You can find bank accounts designed for freelancers that help you set aside a portion of every paycheck for taxes so that you don’t accidentally spend the money. For example, the digital account Lili sets aside tax money, runs expense reports and pays you up to two days earlier than traditional banks.
If you’re required to pay quarterly taxes and miss a filing, you may pay a tax penalty of 0.05% of your balance due for each month after the deadline, with a cap of 0.25%
Talk with a tax or financial professional to learn whether paying quarterly is best for your freelance or independent contracting situation.
You can take advantage of setting your own price, working around your own schedule and controlling how you meet your obligations to your clients as an independent 1099 worker. But you’ll typically lose out on employee benefits like compensated time off, overtime and unemployment benefits, not to mention the responsibility of filing your own taxes throughout or at the end of the year.
Maximize your tax savings by having this 1099 expense tracker categorize business purchases for you.
Keep more of your money by aiming for a $0 tax refund from the IRS.
You could cut your tax bill by up to $7,500 with this credit.
Jackson Hewitt is a tax preparation service that lets you file simple returns online or more complex returns for a flat $25.
You need only $12.95 to file federal and state returns with this software.
Here are some rules around what you can claim in your tax return. See our checklist here and know what receipts you need to keep.
Tax breaks for US expats selling foreign real estate exist if you know where to look.
H&R Block offers easy-to-use, quality tax filing services backed up by accuracy and maximum refund guarantees.
TurboTax is DIY tax preparation software with professional support so you can do your own taxes accurately, quickly, and affordably.
My wife got hired at a hair salon as a 1099 employee. Her boss sets her schedule and pays her weekly not invoiced. My question is it legal to do this for an indefinite period of time, seems to me lime she is doing this to avoid unemployment tax and workers comp
Hi John,
Thanks for getting in touch! As it says on the information above, when you work as a 1099 employee, you’re not an employee. Instead, you’re considered an independent contractor. As an independent 1099 worker, you can enjoy the advantages of setting your own price, working around your own schedule and controlling how you meet your obligations to your clients. But you’ll typically lose out on employee benefits like compensated time off, overtime and unemployment benefits, not to mention the responsibility of filing your own taxes throughout or at the end of the year.
Hope this helps!
Best,
Nikki
I make @$500/month as a 1099 employee. Must I file quarterly estimates and who pays the social security on theses wages?
Hi Jimmer,
Thanks for getting in touch with Finder! As it says on the page – Yes, you are responsible for paying your own taxes. Your client will not withhold federal or state taxes, like they will for W-2 employees. Outside of the 1099-MISC, you may need to file your estimated taxes quarterly if you will pay more than $1,000 in taxes for the fiscal year. Also, as a self-employed individual, you must pay Social Security and Medicare taxes.
Hope this helps!
Best,
Nikki