The gig economy has gained immense popularity, more than we could have imagined a decade ago. With its growing popularity, many people are now considering side gigs as their primary or secondary source of income, and it’s not hard to see why. If you are a freelancer or any kind of independent contractor who works for multiple clients, you need to familiarize yourself with self-employment tax. Everyone who falls into the “self-employment” category should use 1099 tax calculator to report their income from different sources.
So, are you a freelancer or a sole proprietor wondering about how much taxes you owe the IRS? It gets pretty challenging when you don’t have an employer who could issue a Form W-2 and withhold a certain percentage of your income for tax purposes. But, there’s nothing to worry about. We have come up with this detailed guide that explains different 1099 forms, who are supposed to file them, and how to calculate your tax bills from the self-employment income. Let’s start with a brief on the 1099 form.
1099 Income: What Does it Imply?
The income you reported on Form 1099-NEC or 1099-K is self-employment income. You don’t necessarily have to be a business owner to fall into this category. In fact, everyone who doesn’t get Form W-2 from their employer needs to file their income tax returns on their own using Form 1099. You can be a full-time freelancer or have a side gig.
Usually, employees don’t have to worry about the income tax, as a small percentage of the income is withheld by their employer and paid to the IRS every quarter. That doesn’t work for self-employed individuals. If you run your own business or work as a freelancer, you must pay the Social Security and Medicare taxes yourself. That’s where the income tax calculator for self-employed individuals steps in. It helps you calculate the total taxable amount you owe the IRS after the deductions and credits.
How to Pay Your Self-employment Tax?
Those who file 1099 forms have to follow the same rules as employed taxpayers. The combined rate for Social Security and Medicare taxes is 15.3%, but since your tax is not withheld from your paycheck, the IRS has allowed a 50% tax deduction. Now, all self-employed taxpayers must pay only half the actual tax they owe the IRS. Those working for an employer are supposed to split the tax amount. The employer pays half, and the other half is paid by an employee.
If you own a small business and work as a part-time freelancer for some extra income, you will have to file multiple taxes. That’s applicable if your earnings from the side gig are more than $400 for the calendar year. If you have been paying income tax for the last few years, you must be familiar with the deductions and credits. Even if you don’t owe any tax, you should fill out the 1040 form if you are eligible for a tax refund. The deductions allow you to lower your taxable income so that your tax bills are reduced drastically, and you have to pay lesser than you owe.
When and How to File 1099 Forms?
The IRS declares a deadline by which all taxpayers — self-employed taxpayers and those who work for an employer — must file their income tax returns. If you fail to file and pay your federal taxes on time, you will be liable for a tax penalty and interest, which is calculated based on the total amount you owe and for how long the tax has remained unpaid.
Now, if the dues on your income tax exceed $1000, you will be charged a penalty. That’s why most taxpayers file their tax returns quarterly. This is called the estimated tax payments. If you are worried you might overpay, rest assured that the IRS will issue a refund at the end of the year.
Suppose you owe $4000 in taxes. You will divide the total dues by 4 and pay them on the 15th of the beginning of the next quarter. That means you have to pay $1000 on April 15, July 15, October 15, and January 15. Calculating your estimated tax payment is not that easy, though. You can use the 1099 tax calculator to simplify the calculation. The tool allows you to deduct the expenses and calculate your taxes after reducing tax credits and the refundable amount.
How to Lower Your Self-employment Tax?
Most freelancers end up overpaying or underpaying their self-employment tax, as its calculation is comparatively more difficult than the tax deducted from your salary. Since there’s no fixed dollar amount, it can be pretty challenging to figure out your taxable income. Besides, the deductions differ for self-employed individuals and those working traditional jobs.
If you run a home business or have dedicated a corner of your room for office use, you can claim deductions on that too. Fortunately, IRS has allowed several deductions, making taxes affordable for self-employed individuals. As mentioned before, the biggest relief you get in self-employment taxes is the 50% straight deduction, which lowers your taxable income by half. The best part is you can subtract more deductions to lower your adjusted gross income. Let’s check out a few tips that can help lower your self-employment income and tax bill.
Deduct Your Business Write-offs
Never wait till the deadline for filing your income tax. People often ignore their business purchases, investments, and expenses until the tax season arrives. Remember that the IRS requires you to keep a receipt for every transaction you deduct from your income tax as an expense. It’s impossible to recall your spending when you are filing the tax returns, which is why you should keep a note of all expenses and save receipts and other proof. Here are a few deductions you can claim:
- Wi-Fi and phone bills
- Toll passes
- Fees or the cost of study material you bought for training
- Computer and software fees
These were only to name a few. There are plenty of such deductions that can lower your taxable income drastically, saving you a lot on your income tax. You can use the 1099 tax deduction calculator to determine your net taxable income.
Report Errors Immediately
Another advantage of paying your income tax on time is that you get sufficient time to check those piles of 1099 forms and report an error. Suppose you work for a client who has issued a 1099 form reporting your annual income of $7,000, but you earned $700 from them.
This is clearly an error that can cost you more in income tax than you owe. If that happens, you should ask your client to correct it before they send it to the IRS. Even if your client has sent the form with incorrect information to the IRS, there’s an option to rectify it. They can fill out another form with the correct information.
Understand Different 1099 Forms
1099 forms are available in 20 types. You need to fill out one or more forms depending on the sources of your income. We have listed a few popular 1099 forms that a self-employed taxpayer should know.
- 1099-INT: The maximum limit for your taxable income from self-employment is $400, but there’s an exception. If you’ve earned interest above $10 from a bank or investments in a financial year, you must fill out the 1099-INT form.
- 1099-DIV: A dividend is another popular source of income paid to each investor as a reward for holding a company’s stock for a specific period. If you report income from dividends, fill out the form 1099-DIV to calculate the taxes owed on the dividend.
- 1099-G: This tax form is for taxpayers who report an income from the government. If the federal, local, or state government paid you unemployment benefits or a local tax refund, you need to show it on the 1099-G form and calculate the due tax.
- 1099-S: For taxpayers who have earned from real estate transactions, the form 1099-S is issued. If you have sold a property, land, or a commercial or residential building, you will be liable for tax. Fill out the form 1099-S if you have closed any real estate sales.
- 1099-MISC: Income from sources other than what falls into the above-listed 1099 categories can be shown on form 1099-MISC. Examples are prizes and awards won in a competition.
- 1099-NEC: The income that’s currently reported on form 1099-NEC was earlier specified on the 1099-MISC form. The form is issued by a business that reports non-employee compensation. If you have worked with an independent contractor or a freelancer and paid $600+ in a financial year, you need to report it on the form 1099-NEC.
Ask your clients to issue the necessary 1099 forms and send a copy to you before the tax filing day. You need these forms to calculate your total taxable income. If your client forgets to send you the 1099 form, the IRS will send you a letter notifying you about the total tax you owe.
Paul is an content marketing strategist and serial entrepreneur.