What does it mean to be a 1099?

Setting your own schedule and choosing only the projects you want take on may sound like a dream. And if it’s done right, it can be.

There’s a lot of ambiguity when you’re just starting out though — and 1099s can be at the center of that mystery. We’ll go over what a 1099 employee is, how it impacts how you work and what you should know about the often dreaded tax filings that come with it.

What is a 1099 employee?

To call somebody a “1099 employee” is misleading: To the person or company you’re working for under a 1099, you’re not an employee. Instead, you’re considered an independent contractor. Your income throughout the year is reported to the IRS with Form 1099-MISC.

Independent contractors are different from employees in that you are providing your services to the client, but the way you’re providing them is completely up to you. You’ll 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.

Common types of independent contractors include:

Who is usually classified as a 1099?

Federal and state governments use different rules to determine whether someone should be classified as a 1099 employee.

Federal requirements

The IRS uses these three basic categories to determine if an employee is an independent contractor:

• Behavioral control. The right of the employer to direct or control how you do the work could make it less appropriate for them to classify you as an independent contractor. Your title or merely allowing you to choose your own hours isn’t enough to free an employer from correct classification.
• Financial control. If you’re paid on your own terms — for example, after invoicing the employer — investing in your own equipment and paying your own taxes, you’re more likely to be classified as 1099.
• Relationships. If the business you’re working for hires you on for an indefinite period without a contract, provides benefits and protection and considers your work a key aspect of the business, you’re typically classified as a W-2 employee.

State requirements

Every state has its own way of classifying independent contractors. Many use the ABC test to determine if an employee is an independent contractor:

• A: The worker is free from control and direction of the hiring entity.
• B: The worker performs work outside the employer’s scope of business
• C: The worker is customarily engaged in a similar trade, occupation or business similar to the hiring entity’s.

The benefits and drawbacks of being a 1099 employee

Do I have to pay taxes as a 1099 employee?

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.

If your pay is $600 or more, you should receive Form 1099-MISC 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 will pay more than $1,000 in taxes for the fiscal year.

All 1099 employees pay a 15.3% self-employment tax. There are two parts to this tax: 12.4% goes to Social Security and 2.9% goes to Medicare. It’s your responsibility to set aside money to cover these costs as clients aren’t required to withhold these taxes from your paycheck.

Take advantage of the worksheets and resources for filing available on the IRS’s website. If you’re unsure whether you owe taxes or should file a 1099-MISC, it’s probably a good idea to speak with a tax professional.

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How to file Schedule C for 1099-MISC

Here’s a brief rundown of how to fill out Schedule C:

1. 1. Calculate your gross income by adding up all the income from your 1099 forms and any employer who paid you less than $600. (If you sold physical products, subtract your returns and cost of good sold to get your gross income.)
   2. List out all your business expenses on lines 8 through 27 of Schedule C. Add them all up to get your total business expenses.
   3. Subtract your total business expenses from your gross income to calculate your tentative profit or loss.
   4. Use line 31 to calculate your deduction for the business use of your home and vehicle and subtract these expenses from your tentative profit or loss to get your net income.
   5. Carry your net income from line 31 of Schedule C over to line 12 of your Form 1040.

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What is a 1099 form?

A 1099 form is an “information filing form” that proves some other entity besides your employer paid you money. There are many different types of 1099 forms. 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.

Types of 1099 tax forms

You may receive a 1099 tax form for all types of reasons. Here’s a list of the most popular ones:

• 1099-A

  If your home foreclosed this year, you may receive Form 1099-A. This form lists out information about your home’s fair market value, the date of transfer and your existing loan balance. Use this information to determine if you’ve had a gain or loss on your property and owe any capital gains taxes.

• 1099-B

  This tax form lists any gains or losses you incurred from broker and barter exchanges during the year. You’ll use this information to fill out Schedule D when filing your taxes.

• 1099-C

  If any lender cancels or forgives at least $600 of your outstanding debt, this is seen as taxable income in the eyes of the IRS—even if you don’t receive any income at all. You’ll have to report any amount listed on this form as taxable income when you file your return.

• 1099-CAP

  You’ll receive Form 1099-CAP if you own stock in a corporation that experiences significant changes in capital structure and received cash or other property as a result.

• 1099-DIV

  If you own any stocks, mutual funds or other investments that paid out dividends this year, you’ll receive this form. However, dividends earned from a credit union are considered interest, so those are listed on Form 1099-INT.

• 1099-INT

  Anyone who earns at least $10 in interest from a bank, credit union or other financial institution receives Form 1099-INT. Interest is considered taxable income, so you’ll report these earnings when you file your taxes.

• 1099-LTC

  This form is issued to anyone who receives long-term care benefits or accelerated death benefits. It’s typically sent out by the insurance company in charge of your benefits.

• 1099-MISC

  If you’re an independent contract worker, you’ll receive Form 1099-MISC from each business that paid you at least $600. Even if a business doesn’t send you this form, you’re still required to report 100% of your earnings to the IRS.

• 1099-NEC

  This form is brand new for 2020 and stands for Nonemployee Compensation. If you are a contract or freelance worker, you may receive this form instead of the usual Form 1099-MISC in 2021.

• 1099-OID

  If you bought any long-term bonds, CDs, time deposits, notes or other financial securities at a discount, you’ll receive Form 1099-OID. It lists out any interest, profit or loss you made on your securities.

• 1099-PATR

  If you’re a co-op member and earned at least $10 in dividends for the year, you’ll be issued Form 1099-PATR.

• 1099-Q

  Anyone who receives distributions from a 529 college savings plan or Coverdell education savings plan (ESA) will get a copy of this form. You shouldn’t need to report these distributions on your taxes unless they’re considered taxable income.

• 1099-R

  The “R” in this form stands for retirement. If you took any distributions from a retirement account, pension plan or annuity, you’ll receive this form. Whether you need to report these distributions as income depends on the account they came from. Roth IRAs have tax-free withdrawals, so you can simply use the form for record-keeping purposes. But if you withdrew money from a traditional IRA or 401(k), it will likely be reported as taxable income.

• 1099-S

  If you sold your house or any other real estate this year, your earnings will be listed on form 1099-S.

• 1099-SA

  You’ll receive Form 1099-SA if you made any distributions from your health savings account (HSA). These distributions typically don’t count as taxable income, so you shouldn’t need to do anything with the information on the form.

Common 1099 expense deductions

There are many different types of business expenses you can deduct from your taxes as a contractor. Here are 10 popular options:

1. 1. 1. Home office expenses
      2. Work supplies
      3. Utilities
      4. Health insurance premiums
      5. Travel and meal expenses
      6. Car expenses and mileage
      7. Legal and professional services
      8. Fees, dues and subscriptions
      9. Continuing education
      10. Taxes and licenses

How to claim business expenses as a freelancer

You use Schedule C to calculate and claim business expenses. Here’s how:

1. 1. 1. Calculate your gross income using boxes 1 through 7.
      2. List all your business expenses in boxes 8 through 27.
      3. Add up your business expenses and enter the total amount in box 28.
      4. Subtract box 28 from box 7 to calculate your tentative profit or loss. Enter this number in box 29.
      5. Calculate the expenses for the business use of your home using box 30.
      6. Subtract this expense from your tentative profit or loss on box 29 and enter this number in box 31.

The dollar amount listed on line 31 tells you your net profit or loss for your business.

How to pay your taxes online

Throughout the year, it may be a good idea to either do your accounting yourself or hire a professional so you can keep your books organized before filing taxes.

At tax time, you will have a record of your income and any allowable deductible expenditures to refer to.

How to do your taxes online

How much should freelancers budget for taxes?

Most experts recommend setting aside 25% to 30% of your paycheck for taxes. This may sound like a huge chunk of change, but you’re not just paying income tax. As a freelancer, you’re also responsible for self-employment tax, which covers Medicare and Social Security.

You send this budgeted money to the IRS every three months in the form of quarterly estimated payments. This allows you to pay your taxes as you go, just as your employer would do if you had a W-2 job. If you file your taxes and find out that you overpaid, you’ll get a refund.

For the 2020 tax year, quarterly estimated payments are due:

• July 15, 2020 for income earned in Jan, Feb and March
• June 15, 2020 for income earned in April, May and June
• Sept 15, 2020 for income earned in July, Aug and Sept
• Jan 15, 2021 for income earned in Oct, Nov and Dec

Bottom line

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.

Frequently asked questions about 1099 workers

• What happens if I don’t file quarterly estimated taxes and simply file my taxes at the end of the year?

  The IRS enforces a penalty on late payments of estimated taxes, even if you file at the end of the fiscal year. In most cases, this is true even if you are due a return from your filing.

• What should I do if I think I’ve been misclassified?

  If you think your client is misclassifying your employee status, you should first speak with them about your relationship. If a W-2 classification would serve you better, bring it up. If your client is not receptive to the conversation and you still feel that you are acting more as an employee to the client than an independent contractor, File Form SS-8 — Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding to request a determination.

• Are there any resources for planning and maintaining my business as an independent contractor?

  Yes. As an independent contractor, you are generally considered a small business. Federal, state and local programs exist to help small businesses. The US Small Business Administration is a good place to start whether you’re just starting out or already running.