1099 Tax Rate for 2018 and 5 More 1099 Worker Tax Tips
When you start a new job, you’re probably thinking more about learning the ropes than figuring out your taxes. If you’re a 1099 self-employed worker, you should know that paying taxes is different from working as a company employee. With those differences, there also comes a bit of confusion.
For instance, some self-employed workers will ask about the 1099 tax rate for 2018. However, this type of tax doesn’t exist. What a self-employed person actually pays is both ordinary taxes (which vary from 10% to 37%) and self-employment taxes (which might be misunderstood as a 1099 tax rate).
In this article, we’ll cover this and other tax considerations specific to independent workers. Read on to find six things all 1099 workers should know.
6 Tax Tips for 1099 Workers
From how and when to pay taxes to types of deductions you can take, it’s important to understand what’s different when you’re an independent worker.
1. Self-employment taxes. In general, most workers must pay Social Security and Medicare taxes. If you work as a company employee, your employer typically withholds this from your paycheck as part of payroll taxes. By contrast, 1099 workers need to account for these taxes on their own.
The self-employment tax rate for 2018 is 15.3% of your net earnings (12.4% Social Security tax plus 2.9% Medicare tax). While the Medicare portion of the tax applies no matter how much you earn, the Social Security portion applies to earnings up to $128,400 for 2018. You should also know that you can deduct half of this tax as a deductible expense.
2. Quarterly estimated tax payments. The US is a pay-as-you-go tax system, which means you're required to pay taxes on your income periodically throughout the year. When you’re a company employee, employers withhold income tax from your paycheck automatically. On the other hand, 1099 workers need to make estimated tax payments to the IRS and applicable state revenue departments on their own on a quarterly basis. How much will you need to pay? If you use H&R Block’s Self-Employed Online filing product, it will help you estimate your payments based on your previous year’s income.
3. Underpayment penalty. What happens if you miss or skip the estimated tax payments? If you fail to make the required payments, you may be subject to an underpayment penalty. The penalty equals the product of the interest rate of 5% (for 2018) charged by the IRS on deficiencies, times the amount of the underpayment for the period of the underpayment. You can avoid the penalty if you qualify for certain specified exceptions or waivers.
4. Tax forms. At the same time companies are sending W-2s to their employees (by 1/31), you should be on the lookout for a 1099-MISC and/or 1099-K. The 1099-MISC reports non-employee compensation and is issued by the business you provided services for. If you use a payment processor, such as Square, PayPal, or Uber, it will send you a 1099-K, which shows you the total of your transactions month by month.
Take note: You won’t receive the forms if certain criteria are not met, but you still must report the income. Here are the details.
For the 1099-MISC: The business will only send it if you earned $600 or more in income.
For the 1099-K: The processing service will only send you the 1099-K if they process 200 transactions or more and $200,000 worth of payments.
Whether you receive the form(s) or not, you should report your independent contractor income to the IRS on a Schedule C.
5. Filing requirements. Generally, if your W-2 earnings were below the standard deduction for your filing status, you would not be required to file a tax return. However, with self-employed income, that threshold drops to $400. That means if you have 1099 income of $400 or above, you’ll be required to file a return even if your total income wouldn’t qualify you to file a return. For example, if you file as Single, and your total income was less than $12,000, but you made $500 in self-employment income, you’d still be required to file a return
6. Deductions. As a self-employed worker, you’ll want to be aware of helpful tax deductions for independent contractors in 2018 and beyond.
Qualified Business Income Deduction: This is a new law helpful for independent contractors. If you have “pass-through” income–meaning you report your business income on your personal return–you can deduct up to 20% of your qualified business income, which helps you lower your taxable income and pay less in taxes.
Self-employed health insurance deduction: If you’re not otherwise eligible to receive health insurance coverage from a spouse or employer, you can deduct what you pay for health insurance up to the limit of your business profit.
Vehicle expenses: You can deduct this expense in one of two ways: either with actual expenses or standard mileage. You’ll need to track your mileage for both methods. Examples of actual car expenses include the cost of gas, repairs, car payments, and depreciation. If you go the standard mileage route, you’ll use the rate of 54.5 cents per mile for 2018.
Getting Help with Your 1099 Tax Changes for 2018
Whether it’s your first tax return as a self-employed worker or you’re a seasoned pro, H&R Block’s Self-Employed Online filing product can help. It’s a simple and easy-to-use program designed especially for self-employed taxpayers.
As part of our partnership with H&R Block, Mike Slack, JD, EA and senior tax research analyst at The Tax Institute at H&R Block will be providing insight on various topics throughout tax season.