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For example, if you earn $15,000 from working as a 1099 contractor and you file as a single, non-married individual, you should expect to put aside 30-35% of your income for taxes. Putting aside money is important because you may need it to pay estimated taxes quarterly.
Nevertheless, independent contractors are usually responsible for paying the Self-Employment Tax and income tax. With that in mind, it's best practice to save about 2530% of your self-employed income to pay for taxes.
A business may pay an independent contractor and an employee for the same or similar work, but there are important legal differences between the two. For the employee, the company withholds income tax, Social Security, and Medicare from wages paid. For the independent contractor, the company does not withhold taxes.
You should plan to set aside 25% to 30% of your taxable freelance income to pay both quarterly taxes and any additional tax that you owe when you file your taxes in April. Freelancers must budget for both income tax and FICA taxes. You can use IRS Form 1040-ES to calculate your estimated tax payments.
1099 employees are self-employed independent contractors. They receive pay in accord with the terms of their contract and get a 1099 form to report income on their tax return. A W2 employee receives a regular wage and employee benefits.
A 1099 worker is one that is not considered an employee. Rather, this type of worker is usually referred to as a freelancer, independent contractor or other self-employed worker that completes particular jobs or assignments. Since they're not deemed employees, you don't pay them wages or a salary.
With 1099 workers, you don't have to worry about offering them employer-sponsored benefits. Independent contractors are also not covered by workers' comp and unemployment insurance, saving you on these expenses as well.
Self-employment tax is owed on your commission income only when you're an independent contractor. This is the tax comprising Social Security and Medicare taxes paid by people who work for themselves.
A 1099 refers to the tax form companies must provide to independent contractors for work performed throughout the year. Business taxpayers must report nonemployee compensation of $600 or more to the IRS using a Form 1099-NEC, Nonemployee Compensation.
To find out what your tax obligations are, visit the Self-Employed Individuals Tax Center. You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action.