The gig economy is the all-new way of going ahead with the modern world. More individuals than ever are earning side income and freelancing.
Eventually, this is why you should make use of the 1099 or self-employed tax calculator. You, along with multiple taxpayers out there, should learn how to navigate 1099 income taxes. It primarily starts with knowing how much self-employment tax you are expected to pay.
What does it Imply to have 1099 Income?
Any income that is reported on the 1099-K or 1099-NEC is regarded as the 1099 or self-employment income. Self-employment income is just the code for ‘non-W2.’ In this case, the income is achieved out of running a small-scale business, working on some side hustle, or freelancing.
When you are working as a standard employee, the employer will automatically withhold your overall income along with the FICA taxes (including Medicare and Social Security Taxes) while paying the same to the IRS. On the other hand, self-employed individuals are expected to make use of the 1099 tax calculator to pay off the necessary income taxes themselves.
How to Pay Taxes as a 1099 Employee?
When you earn income out of the 1099 taxation policy, you are expected to fulfill the proceedings of the self-employment tax. It is the way through which you ensure the payments of the FICA taxes. The rate for combined tax is expected to be 15.3 percent.
Usually, the tax rate of 15.3 percent is divided in equal halves between the employees and the employers. However, as independent contractors do not feature specific employers, they are responsible for the entire amount.
Self-employment tax can be divided between two individuals. However, it is available as a single package. There is no way to pay for both the parts even if it is only you involved in the business. Thankfully, the net earnings are only subject to self-employment or 1099 taxes.
Income Tax Vs. Self-employment Tax -Do You Owe Both?
Most freelancers or self-employed individuals are surprised to realize that they are expected to pay several taxes on the overall return. Self-employed individuals are expected to pay both self-employment as well as income taxes. What is the difference between the two?
Income tax is analyzed on the total annual income. On the other hand, self-employment tax is analyzed on the business income of the given year. It is possible to minimize the income tax with the help of itemized or standard deductions, tax credits, or adjustments. On the other hand, it is possible to minimize self-employment taxes only on the basis of tax credits or business write-offs.
Paying the 1099 Self-employment Tax
To analyze and pay your 1099 self-employment tax effectively, you are expected to use a reliable 1099 tax calculator to come up with the desired outcomes. If you assume that you tend to owe more than $1000 in the form of federal income tax, then you should aim at making payments throughout the year -not just when you are filing the income tax return.
The additional payments that you make throughout the year are known as estimated or quarterly tax payments. You are expected to pay the quarterly tax payments on the 15th day after the quarter’s end.
For instance, let us assume that you owe around $2000 in total taxes. You can divide the amount by 4 while making your quarterly payments on different schedules.
Best Ways to Minimize the Self-employment Tax
Here is the fun part -minimizing your tax bills. The only way to minimize the self-employment tax is by lowering the net income.
Some of the best ways to avoid paying additional taxes on the 1099 income are:
#Avoid Missing Out on Business Write-offs
Most of the business write-offs gets missed as people are not able to keep a track of what they are buying for work. In the rush to pull together everything before the taxes are due, eligible business write-offs start falling through the cracks.
In this scenario, you should aim at keeping up with the overall expenses by now. A majority of your purchases is counted as business expenses than you actually realize. They can significantly help in lowering your taxable income.
Some of the common business-centric tax deductions you can apply for are:
- Software subscriptions like Microsoft 365
- Work-related toll passes and parking fees
- Internet and smartphone bill
- Electronic accessories and computers
- Credit card and bank fees on the accounts that are used for business
#Think of Deferring the Business Income
This might not be a feasible option for all self-employed individuals out there. For instance, delivery drivers or rideshare employees are locked away into an inflexible payment schedule. However, individuals that invoice the respective clients, they can consider delaying the invoicing part during December until January next year.
It is because the payment you will receive on 31st December is expected to be reported on the respective tax return by the time of following April. However, the payment you will receive on 1st January is not expected to be reported until April the next year. This counts for additional 11 months.
When you delay your income only by a few days, it can offer you additional breathing room to plan out your taxes.
#Prepay the Work or Business Expenses
When you are aware that you are involved in a stressful tax bill, you can try out this strategy. You need to understand its working. Instead of waiting until January to pay the bills that are scheduled regularly, you can think of paying them in December.
For instance, if the business or work rent is due on 5th January, then you can think of paying it by 30th December. It will enable you to claim more income tax deductions in the ongoing tax year -typically borrowing from the write-offs of the upcoming year.
When you make use of this tax reduction strategy, it is crucial to plan ahead first. Some of the situations in which prepaying can turn out to be a beneficial move while allowing you to save money significantly are:
- You have a sizeable tax bill & you have not made estimated tax payments -In the given scenario, minimizing the tax liability as you prepay expenses is an effective way. The lower your tax liability will be, the less you will be paying in the form of underpayment interests or penalties.
- You do not expect to report significant self-employment income the upcoming year -People are known to change jobs as well as careers almost all the time. If you are expecting a major change in the type of income you are currently earning, it is important to maximize the write-offs currently.
- You expect having more tax-saving opportunities the upcoming year -It is possible to lower self-employment tax only in two ways -tax credits and business write-offs. Therefore, for instance, if you have plans of enrolling in college, you will have a significant tax credit to deal with. In the given scenario, borrowing from the write-offs of the next year should not hurt your profile.
You can think of writing off expenses that might be more than a year away. However, this strategy will offer you the much-needed room during stressful moments.
Setting Aside Money for Your 1099 Taxes
Once you have made the estimation of how much you are expected to save every month for the 1099 taxes, the next step is the creation of a system for saving the particular amount of money. Firstly, it is recommended to set up a dedicated bank account to save your money that you will use towards paying estimated taxes. In this way, you do not have to worry about spending your money accidentally.
There are several ways you can use to save 1099 taxes. For instance, you can think of setting aside a dedicated portion of every payment received as the payments come in. Or, you can think of making a single large transfer of the 1099 bank account at the month’s end.
You can also avoid penalties for the underpayment of estimated taxes, but only in exceptional cases. If you wish to avoid the tax penalty, you should reveal that:
- You are owing less than the amount of $1000 in tax after subtracting credits and withholdings
- You have made a payment of around 90 percent of the total tax for the ongoing year or 100 percent of the total tax revealed on the return the previous year -whichever might be smaller
Conclusion
If you are starting out, it is highly recommended to make use of a reliable 1099 tax calculator to effectively assess as well as pay the taxes on time. The best way is to take help from an experienced financial advisor to ensure that you are paying the right amount of tax while understanding potential deductions at the same time.
