If you are a freelancer / independent contractor wondering "How much should I set aside for taxes?" (1099-NEC / 1099 MISC tax forms), read on to see what you need to do to figure out what you owe in taxes -- as well as how to optimize this process so that it doesn't take up too much of your valuable time, effort, and nerves.
While the W-2 employees get to wait for their refund from the IRS after they file taxes in April, 1099 independent contractors are required to pay taxes -- and not just at the end of the year, but four times per year, once for each "quarter".
This is because W-2 employees have tax estimates withdrawn automatically throughout the year from their paycheck with their employer, whereas self-employed workers deal with multiple employers and clients, many of whom pay for their goods/services in full, pre-taxed. It is, thus, up to the independent contractor to calculate and pay the taxes they owe from the untaxed earnings to the IRS.
A general rule of thumb is to set aside 30-35% of your income for your taxes. In this article, we'll talk about all the taxes you'll need to pay and why you should save this percentage amount from the money you make.
Note: Those who think this sounds intimidating and labor-intensive can greatly improve the whole experience by signing up for Bonsai Tax. Our expense tracking app will help track money coming in and out of your business, sort deductions, file taxes, and estimate the quarterly taxes every ninety days, based on the income.
Claim a 7 day free trial here.
1099 workers are expected to pay income tax on both federal and state level, as well as self-employment tax. Let's break down each of these.
This is an annual tax levied by the government on personal income.
Residents of all fifty U.S. states are subject to federal income tax, with a new tax bracket breakdown set by the IRS each year.
Most, but not all, U.S. states tax income. As of 2024, there are nine states that have no personal income tax requirements:
However, no personal income tax requirements don’t necessarily mean no state taxes at all. For instance, many of them still have sales taxes, such as Nevada, which charges sales tax on items such as groceries and alcohol. So, you’ll still need to research the specific requirements for your state to see if what you’re selling is subject to taxation and ensure you have the money available that needs to be set aside.
1099 workers additionally pay self-employment tax (SE) to the IRS. The self-employment tax serves as a Social Security and Medicare tax for individuals working for themselves.
You need to pay SE taxes on 92.35% of your net earnings from being self-employed.
The SE tax rate for 2023-2024 is set at 15.3% (12.4% for Social Security + 2.9% for Medicaid). However, the Social Security part of your self-employment tax only applies to the first $160,200 of your combined net earnings, wages, salary, and tips. That may prove useful if your business is a side hustle, and you earn the majority of your money from a regular job. In this case, if the combination of your wages and tips total more than $160,200, you don’t have to pay the 12.4% Social Security tax on the rest of your net earnings.
However, the 2.9% Medicaid tax is payable regardless of how much you earn, in addition to another 0.9% payment if your income exceeds one of the following filing thresholds:
It’s also worth noting that you may be able to deduct a portion of your self-employment tax from your federal income tax return. The IRS says you can deduct the employer-equivalent portion of the tax – which varies depending on the companies you work with – from your return. Note that this deduction doesn’t apply to your net earnings and it isn’t a deduction from the self-employment tax itself. Rather, you deduct it from the total income you state on your federal returns.
Finally, you may be able to claim an Earned Income Tax Credit when filing using Schedule C of your Form 1040.
To quickly see how much money you’ll owe, use our free 1099 tax calculator to figure out your total.
On the surface, it would appear that self-employed people pay more in taxes than average W-2 workers. While their income tax brackets are the same, the need to pay self-employment taxes to cover Social Security and Medicaid can be a real burden. Even in cases when you can deduct an employer-equivalent portion from this tax, you’ll likely end up paying more than a W-2 employee who has these taxes automatically withheld from their paycheck.
However, the self-employed have an advantage that W-2 workers typically don’t have – they can deduct business-related expenses.
You’ll discover what some of these expenses are in more detail later in the article. However, anything that is considered an “ordinary” expense for somebody in your field, on top of any “necessary” expenses you incurred to complete a job can be deducted.
That ability to itemize and claim deductions really comes into its own when your expenses exceed the standard deduction that the IRS offers on federal income tax. In 2024, that deduction stands at $13,850 for single filers and $27,700 for joint filers. You can still claim these standardized deductions as a 1099 contractor if you want. However, if your itemized list exceeds the standard, you’ll find your tax bill coming down in comparison to a W-2 employee who may not be able to claim any deductions at all.
But on the flip side of that, self-employed people may also have to pay sales tax on physical products. Some, including those in South Dakota, New Mexico, Hawaii, and West Virginia, may also have to pay sales taxes on the services they provide, which may not involve a physical product at all. There are also state and local-level licenses and permits to consider, the need for which can vary drastically by state and can essentially be considered an “unofficial” tax.
So, this is a difficult question to answer.
But on a very general level, a 1099 contractor may pay more taxes in total than a W-2 contractor. However, their ability to make deductions (again, this varies depending on your state) may help them to drive their bill down. Add to that the fact that the self-employed technically have no ceiling on their income potential due to not being salaried and it’s still possible to take home more than a W-2 employee in your field.
Unlike W-2 workers whose taxes are automatically withheld with every paycheck, 1099 workers must set aside quarterly taxes to be paid to the IRS throughout the year. So, you’ll typically pay taxes four times per year, though it’s also possible to pay in more regular installments, assuming the total amount paid each quarter is roughly the same.
Yes, paying quarterly taxes is obligatory for self-employed workers who will owe $1000 or more in taxes for the year. Failing to make these payments means you’re late in paying, though not necessarily late in filing, which usually results in a financial penalty from the IRS.
U.S. taxes are "pay-as-you-go": your estimated taxes are either withheld from every paycheck you receive from an employer -- or, if you are self-employed, you are responsible for withholding those sums yourself and paying them in full each quarter.
If the independent taxpayer fails to set aside and pay estimated quarterly tax in its entirety or misses the deadline, they may get fined, typically 3% of the tax owed (though, if they use the Bonsai Tax quarterly estimated tax payments calculator, they will be spared both, the fine and the stress...)
Though your personal income tax filing deadline date is the same as any other individual – April 15, 2024 – you have the additional burden of paying quarterly taxes as an independent contractor.
Here are the key deadlines you need to know for 2024:
Your fourth quarter payment for the 2024-2025 tax year is due on January 15, 2025. You’ll note that’s a slightly different date than that for the fourth quarter payment for the 2023-2024 season, which emphasizes the need to stay informed about your tax deadlines. Little changes like that could result in a late payment, incurring penalty fees due to a small mistake made based on an assumption.
Your estimated quarterly taxes are supposed to be set aside and paid in four installments, equal ones if you can help it (if your income varies significantly from one quarter to the next, you will likely have to attach IRS form 2210 with your annual return). More frequent installments can be made, as long as they are equally distributed among the four quarters (e.g. 12 annual payments, once a month/three times per quarter).
Independent contractors with steady incomes can estimate their current year's projected income on the basis of last year's earnings.
Those freelancers whose incomes fluctuate significantly from one quarter to the next may be better off calculating each quarter's individual tax payment on the basis of that quarter's income and expense deductions.
Once you have an idea of how much 1099 income you will make over the year, you can look up the tax bracket you belong to, which will determine the percentage of your income you need to save/put aside for estimated taxes each quarter.
Each year’s federal income tax rate is different from the previous year’s percentage. The income limits are as follows for single and joint filers:
10%
12%
22%
24%
32%
35%
37%
Keep in mind that the tax system is progressive, meaning that your income is not taxed at a single tax rate in its entirety, but at different rates for its different gradations. However much income you earn, it will be taxed as follows in 2024:
Determining the estimated tax payments to set aside for taxes each quarter takes the following three steps:
Bear in mind that you may also have to account for local and state taxes on top of this calculation. However, most states don’t require independent contractors to pay quarterly. You’ll usually pay at the end of the tax year, though it’s always recommended that you research your state’s taxation laws to ensure you’re putting enough aside to cover these more local taxes along with your federal taxes.
It’s clear that figuring out self-employment taxes requires budgeting, which is part of financial planning and needs to be built into how you operate your business. Much of what you owe can be estimated using calculators – which at least helps you to keep up with quarterly payment requirements – but there’s another factor at play:
How much you pay in tax is influenced by deductions.
For your federal income taxes, the IRS will usually allow you to make a deduction for any expense that it considers “ordinary” or “necessary.” In the simplest terms, an “ordinary” expense is any that you’d be expected to incur as part of doing your job. As for “necessary,” the expense may not be something that you ordinarily incur, but it may be one that was required for you to complete a specific job for a client.
For instance, let’s say you deliver food as a DoorDash driver. Technically, you’re not a DoorDash employee in this scenario – you’re more of a gig worker that the company contracts as a freelancer – so any income you receive is subject to self-employment regulations. Your car, and many of the expenses related to it, would be considered “ordinary” because you need the vehicle to work. That means you can usually claim mileage deductions and, in some cases, maintenance because you’re using the vehicle for non-commuting reasons.
There would also be your car loan or lease payments to consider. These are typically not fully tax-deductible in this scenario. But you’ll likely be able to claim for a portion of your car payment – roughly equivalent to the percentage of use for business versus the percentage of personal use. That can be a complicated process, which is why it’s worth checking out our article on writing off car payments to get more details.
How about a necessary expense?
Let’s say you’ve taken a role that requires you to work inside a client’s business. You’re not a W-2 employee – they’ve hired you as an independent contractor – but they require you to wear a company uniform while on their property. If you had to pay for that uniform, that would be a “necessary” expense. It’s one that you don’t ordinarily incur as part of your work, but it was necessary for the role you’ve taken.
There are many more examples of both:
There are many others on top. For instance, equipment depreciation is a common deduction. An independent contractor who programs software sees the value of the hardware they use decrease in value every year. That depreciation can be claimed as a deduction, as can the cost of buying the equipment in the first place.
Even with all of that information, it’s still possible to miss deductions to which you’re entitled. And if that happens, you may not be able to claim those deductions during the next tax year. To maximize your deductions – and minimize your tax bill – make sure you check out our 21 best deductions for 1099 contractors article.
Calculating independent contractor income tax can get complicated, which is why it’s best to save for your taxes throughout the year, rather than making a mad dash to get your numbers right every quarter. That requires budgeting. Following the general rule of thumb we mentioned at the beginning of the article – keeping 30% to 35% of your income aside each month – is a good start, but these extra tips help you with your savings.
It is always advisable to err on the side of paying more when you pay your taxes. Whatever you overpay will be refunded to you eventually, whereas paying less will bring on tax underpayment penalties (and you will still need to pay the remainder of what you owe...)
By overpaying, you at least ensure that you avoid the harsh penalties that the IRS enforces on those who fail to pay their full tax commitment for the year. In 2024, the Failure to Pay Penalty is 0.5% of your unpaid taxes for each month for which the tax remains unpaid, though this penalty won’t total more than 25% of taxes you haven’t paid.
That penalty percentage drops to 0.25% if you at least filed your taxes on time and have created an approved payment plan with the IRS. But if you’ve still failed to pay what you owe within 10 days of receiving the notice of late payment with the IRS’s intent to levy, the percentage goes up to 1%.
There is a little bit of leeway if you owe taxes for income that you failed to report on your tax returns. In that situation, the IRS gives you 21 days to make the situation right, down to 10 days if you owe at least $100,000. It then implements the same penalties it would implement for anybody else. And don’t think you can get away with underreporting as a 1099 contractor – the IRS receives copies of every 1099 that you receive.
Finally, the worst part:
The IRS charges interest on these penalties that you also have to pay.
So, overestimate. At least then, you won’t get tangled up in a web of IRS penalties while trying to figure out your taxes for next year.
A certain chunk of your income is advised to be saved quarterly, but how much is often the sticking point for contractors and freelancers. While you can stick to the 30% to 35% rule, your income may vary between quarters, especially if your business is seasonal.
That’s where a self-employment tax calculator comes in.
These calculators allow you to enter all income that is subject to self-employment tax, as well as accounting for any deductions you believe you can make, to come up with an approximate figure that you owe. That’s especially useful for the quarterly payment requirement – you can use a calculator to track income per quarter – with the tip for overestimating coming into effect.
In other words, use a calculator to estimate what you owe, then add a little more on top. Any overpaid tax will come back to you as you can enter the amount of your overpayment in your Form 1040 to request a refund.
Check out Bonsai’s self-employment tax calculator to get started with figuring out how much you owe as a 1099 contractor.
Every receipt. Every invoice. Any scrap of paper – no matter how small – that denotes an expense related to your business needs to be retained so you can claim it as a deduction at the end of the year. The reason being, the IRS may require proof that you’ve actually spent the money you claimed to spend as part of an audit further down the line. You need documentation of anything that is part of self-employment expenses to demonstrate that the deduction is legitimate.
So, file your expenses away as they occur.
You’ll deduct all of them when you complete your end-of-year filing, so it’s best to pay your quarterly payments as though you have no expenses. Then, once you’ve itemized your deductions at the end of the year, you can get a more accurate figure and may put yourself in line for a refund.
Again, it all comes down to the first tip – overestimate and claim back any overpaid tax later.
If you have tax preparation software, you’ll find it especially useful for itemizing your deductions. Some even allow you to scan or import receipts into them, creating an extra layer of proof if the IRS comes calling.
How much tax you pay is determined by income, so being aware of what those brackets are is recommended for saving the appropriate amount of money. In 2023-2024, the IRS will have seven brackets, as discussed earlier in the article.
There are a couple of things to understand about these brackets.
First, the IRS adjusts them every year based on inflation. This means that, though the percentages may stay the same, the income limits typically change each year. The above are the limits for the 2023-2024 tax season, so expect them to be a touch higher for 2024-2025.
Second, this is a tiered tax system.
Let’s assume you’re a single filer who earns $100,000 for the year after deductions. That doesn’t mean you pay 24% income tax for the entire $100,000. Rather, you pay 10% on the first $11,000, 12% on the money earned between $11,001 and $44,725, and 22% for money earned between $44,726 and $95,375. The 24% rate only comes into play at $95,376, meaning you only pay 24% on $4,624 of your earnings in this scenario.
Still, being aware of the specifics of each tax bracket is necessary for freelancers and contractors who want to get the most accurate picture of their federal income tax burden for the year. And remember – these brackets don’t include SE tax or any state or local taxes you have to pay.
No business -- be it a large corporation or a one-person operation -- benefits from attracting the negative attention of the IRS.
Running a "tight ship" on one's taxes may seem like a very daunting task for the already overextended 1099 worker. First of all, it does not have to be -- and second of all, noncompliance with the tax system will result in other daunting and costly consequences.
Mis-reporting income and tax deductions can lead to an IRS audit. Not paying on schedule incurs fines. Messy tax record-keeping leads to errors and misestimations on quarterly and end-of-the-year tax filing which, in turn, result in larger-than-expected sums of money owed to the IRS .
It is, therefore, imperative for every self-employed freelancer / independent contractor to either:
The last option will put you in charge of your taxes at all times while taking the majority of the accounting burden off your shoulders, allowing you to focus on your primary work and clients. Our expense tracker will help you avoid paying 1099 taxes. For a 1099 worker, that tool is Bonsai Tax (as well as its freelancer-oriented all-in-one workflow product suite).
Note: the best way to avoid paying 1099 taxes is to record all your business receipts and tax deductions you qualify for. Bonsai Tax can help. Our app will scan your bank/credit card statement to uncover potential tax write-offs. The majority of users lower their tax bill by $5,600. Claim your 7-day free trial here.
The Bonsai Tax app is the happy medium between going it alone and hiring an accountant. The former is time- and effort-consuming, the latter is expensive. Adapting a digital, cloud-based tax tool, designed specifically for the 1099 contractors' needs, into your business-operating toolkit will do away with most of the labor, while not costing an arm and a leg.
The Bonsai Tax system records your income, scans and imports expense receipts, sorting them into deduction categories to write off at the end of the tax year, generates expense reports to keep you aware of your spending, provides quarterly estimates of how much money you owe in taxes, and fills out the majority of your tax return, come April tax time -- all the while safely storing your data in a cloud-based online account.
The Bonsai Tax software not only helps with tasks, it guides you through the tax record-keeping and filing chores, making you more mindful of doing taxes, while getting more comfortable with the process. Try it for free and experience the Bonsai peace of mind for yourself!
Are you having trouble navigating 1099 forms? Check out this breakdown of all 21 1099 types, and you’ll understand their intended purpose and use in no time.
How do you send W-2 forms as an employer? How do you protect sensitive information when delivering W-2s? Find out right here.
This article will help you understand how to prepare yourself for tax season, prepare and file your taxes according to IRS standards!
