1099 Tax Rate for 2023 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. But what is the tax rate for 1099 income?

Well, this type of tax rate doesn’t exist. What a self-employed person actually pays is both ordinary taxes (which range from 10 to 37 percent) and self-employment taxes (which might be misunderstood as a 1099 tax rate). As a result, what the tax rate is for 1099 income can vary.

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. Here’s how much you should take out in taxes for 1099 work and more:

1. Self-employment taxes. In general, most workers must pay Social Security and Medicare taxes in the form of self-employment 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 2023 is 15.3 percent of your net earnings (12.4% percent Social Security tax plus 2.9 percent 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 $160,200 in 2023.  You should also know that you can deduct half of this tax as a deductible expense.

2. Quarterly estimated tax payments. The U.S. 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. So, how much should you withhold for 1099 work? The 1099 tax percentage depends on how much you expect to earn and whether or not you also have a W-2 job that withholds taxes from your paychecks.

3. Deductions. As a self-employed worker, you’ll want to be aware of these helpful tax deductions for independent contractors: 

• Qualified Business Income Deduction: This law passed in 2018 is 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 percent of your qualified business income, which helps you lower your taxable income and pay less in taxes.

• Vehicle expenses: You can deduct car expenses 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 65.5 cents per mile in 2023 and 67 cents per mile in 2024.

• 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.  If you used to have insurance from your spouse or employer but don’t anymore, you might be eligible to enroll in coverage now.

4. 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 3 percent (for 2022) charged by the IRS on deficiencies, times the amount of the underpayment for the period of the underpayment. Form 2210 can help you calculate your penalty if you owe one. You can avoid the penalty if you qualify for certain specified exceptions or waivers.

5. Tax forms. At the same time companies are sending W-2s to their employees (by January 31), you should be on the lookout for a 1099-MISC, a 1099-K, or both. The 1099-NEC 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-NEC: 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 $20,000 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.

6. 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

Getting Help With Your 1099 Tax Changes for 2024

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