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It’s tax time! If you work and are not a W2 Employee, you are probably an independent contractor and belong to the class of workers called 1099 employees. There are particular rules to follow that are different from a standard W2 Employee so we have complied a guide to cover everything you need to know about taxes as a 1099 employee.
1099 Employees: What to Know Before You File
It’s important to know what your responsibilities are as a 1099 employee. While it may be a bit more complex, it does’t have to be stressful! Make yourself familiar with these rules and you will have no problem staying on top of your tax obligations.
- Quarterly Taxes
As a 1099 employee, you are obliged to pay social security tax as well as estimated taxes. The quarterly taxes include your estimated income tax obligations as well as your social security tax. If you find this to be a trying obligation, it is best to hire an accountant for these services. For more convenience, these quarterly taxes can also be paid on a monthly basis through the IRS website.
- Self-Employment Tax
When you are a W2 Employee your employer pays half of your income tax and the other half is paid by you – all of this is done automatically. As a 1099 Employee, you need to make these payments by yourself. This means that money will have to be set aside at the end of the year to pay the tax the following year. As a result, you should always keep records of how much you earn. Then, as you progress through the year, you can make estimations of how much income tax you owe. Remember to also keep records of expenses and other purchases as you may be eligible for deductions.
- Request Pay Stubs
To avoid any discrepancies in pay earnings, it’s imperative that you have a record of earned income from your clients or employers. The best way is to have a pay stub provided to you. The income on your pay stub will provide you with the information on how much income you have earned from your contractual work. If your client/employer is not familiar with creating pay stubs, you should point them to a pay stub maker to make a simple and detailed pay stub.
As you can see, paying taxes as a 1099 Employee does require you to save money to set aside for your tax obligations. Don’t make the mistake of spending all your earnings, and don’t rely on your next batch of income to cover your tax obligations. Develop a savings plan to set aside money for your tax obligations. You may even want to open a savings account specifically for this money. Estimate how much in taxes would be deducted from each paycheck if you were a W2 Employee and deposit that amount each time you get paid.
- Software or Tax Experts
As an independent contractor, you may find filing your tax return, saving money, and fulfilling all your obligations to be strenuous – even if you know what you are doing. Most people don’t like paperwork, and there’s always a lingering fear that you will make a mistake or forget something when filing your tax returns. Luckily, there is help out there for you. Don’t hesitate to use a software program to help you file your tax returns.
If you’re a high earner and have many sources of income, your tax return is likely to be complex. If you have many expenses and want to make sure you pay as little tax as is possible – you will want to hire a tax expert to help you file your returns. These services will cost extra of course, but they are worth it for the accuracy, peace of mind, and, hopefully, paying fewer taxes.
- Multiple Sources of Income
What you may not know is that being a 1099 Employee can go beyond working for clients as a freelancer or as a contractor for an employee. Understand that you may receive a 1099 form from other sources of income. These can include being a host through a rental service like AirBnB to earning royalties from media for which you own the rights to being an Uber driver. Keep records of income earned from these sources and do not file your tax returns until you have received 1099’s from these sources.
Note: You may receive different types of 1099 forms and you should familiarize yourself with this.
1099 Employees: Prepare to File
Now that you know what to do before you file your tax returns, you will want to know what to prepare before you file. Whether you will file on your own, use a software program, or use the services of a tax expert – make sure you have prepared thoroughly.
- Organize your Income Statements
Make sure you have all your income statements properly organized. This should include all pay stubs. It should also include all 1099 forms received. If you have kept records of your earnings, such as in a spreadsheet, this should also be kept along with these other forms.
Note: If you notice any discrepancies in income earned, this is the time to resolve any issues.
- Organize your Expense Statements
The best way is to create a consolidated statement of all your expenses. You will enter these expenses when filing your return. If you do this correctly, you may be eligible for paying fewer taxes or receiving a tax refund. Expenses vary, and it’s best to consult a tax expert on what counts as an expense. But the usual expense deductions can include the following:
- Home office expenses
- Work supplies and stationery
- Health insurance
- Travel and transportation costs
- Professional services (such as legal services)
- Education fees and license fees.
Once you have organized your income and expense statements, you are now ready to file. Make sure you do so by the deadline.
Ready for Tax Season
Now that you know the tax obligations for 1099 Employees, you’re ready for tax season! Best of luck with filing your returns. Be sure to follow our content for more about the ins and outs of being self-employed.