In this article, you will learn:
Working as an employee with a company is different from working on your own as a self-employed individual. Where the taxes of an employee are withheld by the employer, you as a gig worker, freelancer, independent contractor, or small business owner have to pay your taxes quarterly, work out federal income tax and self-employment tax, and understand tax write-offs for self-employed that you can avail.
You received payments of $600 and more during the tax year as a self-employed worker for which you received Form 1099 disclosing your tax information and gross payments.
Accordingly, you are a self-employed worker whose 1099 income would be subject to both federal income tax and self-employment tax. Yes, self-employed workers are required to pay both federal income tax and self-employment tax on their taxable income.
But some of the critical questions that bother self-employed workers include:
- What is the self-employment tax rate?
- How to do self-employment tax calculation?
- How much amount is payable as income tax for self-employed?
To answer these questions, you must know the 1099 tax brackets and the self-employment tax rate so that it’s easier to plan how much amount you must keep aside to pay for self-employment taxes.
In this article, we’ll cover everything from your taxable income as a self-employed worker subject to tax, and 1099 tax brackets, to how much taxes you pay on 1099 income.
What Do You Mean By 1099 Income?
1099 income is the self-employment income that is reported on Form 1099. You are a self-employed individual in the eyes of the IRS if you are a freelancer, gig worker, independent contractor, or a small business owner working on his own.
Form 1099 reports the payments you receive from a trade or business during the tax year for the goods sold or services rendered and which is further used for filing your tax returns with the IRS.
Since you are a self-employed individual and not an employee, you are required to calculate and pay your taxes all by yourself. This includes:
- filling out your W9 and submitting it to the trade or business from whom you receive payments
- receiving Form 1099 from such trade or business
- figuring out the federal income tax bracket applicable to you
- filing income tax returns in form 1040, 1040 Schedule C
- calculating self-employment tax and filing 1040-SE for self-employment tax
- filing 1040-ES (Estimated Tax) quarterly returns for income tax
- Please note that self-employment tax is your contribution towards the Social Security and Medicare Coverage under the Social Security System. And since your taxes are not withheld and paid by an employer, as in the case of a standard employee, you are required to calculate Estimated Tax and file quarterly tax returns with the IRS in 1040-ES.
This is different from working as a standard employee for a company whose FICA taxes are withheld and paid by his employer to the IRS.
Use Taxable Income to Know Your 1099 Tax Brackets
This is where many self-employed individuals commit errors. To know the tax bracket applicable to you as a self-employed individual, you must first calculate your taxable income. Taxable income is different from gross receipts and is the one that is used to figure out the 1099 income tax rate.
What are Gross Receipts?
Gross receipts refer to the total money you receive from a business or trade for the goods sold or services rendered. Remember, this is the gross or total amount of payments received during the tax period from which no business expenses have been deducted.
What is Taxable Income?
Taxable income or net income is the income that is left after deducting expenses incurred to conduct the business. This is the income you use to figure out the marginal income tax rate applicable to you.
Let’s understand how to calculate taxable income for figuring out the federal income tax rate applicable to you.
1. Deduct COGS and Business Expenses From Gross Receipts to Calculate Net Income From Self-Employment
The first step in the calculation of Taxable Income is to know your Gross Payments and deduct business expenses from Gross Payments. Subtracting business expenses from gross payments will give you Gross Income from Self-Employment. In addition to the standard deductions, self-employed individuals can also deduct expenses they incur to run their business as deductions from gross payments.
Accordingly, whether you are a gig worker, freelancer, independent contractor, or small business, you can deduct business expenses from your gross sales or receipts to lower your taxable income and eventually tax bills. Remember, you do not have to be an LLC to deduct business expenses from gross receipts.
Business expenses are the expenses that are incurred for running your business operations. These could include office expenses, vehicle expenses, travel and meals, wages paid, commission and fees paid, etc.
For instance, you have gross receipts of $100,000 during the tax year from the goods sold or services rendered. Additionally, you have COGS of $10,000 and have incurred business expenses of $20,000. Accordingly, your Gross Income from Self-Employment will be:
(-) Less COGS
(-) Less Business Expenses
Gross Income From Self-Employment
= – $10,000
= – $20,000= $70,000
2. Calculate Your Adjusted Gross Income
Once you have subtracted business expenses from gross receipts, the next step is to calculate Adjusted Gross Income. This is calculated in 1040 Schedule I that relates to Additional Income and Adjustments to Income.
Your gross income from self-employment must be adjusted for any above-the-line deductions. Above-the-line deductions are the deductions that you can subtract or deduct from your gross taxable income to get your Adjusted Gross Income. Some of these above-the-line deductions include the:
- deductible part of self-employment tax
- alimony paid
- student interest loan deduction
- health savings account deduction, etc
Here’s a screenshot of the Adjustments to Income from 1040 Schedule I that must be made to Gross Taxable Income in order to calculate the Adjusted Gross Income.
Say above-the-line deductions amount to $10,000, the AGI works out to be as follows:
AGI = Gross Income from self-Employment – Above-the-line deductions
= $70,000 – $10,000
3. Deduct Standard or Below-the-Line Deductions
Standard deductions are below-the-line deductions that are subtracted from Adjusted Gross Income to calculate your taxable income. Apart from business expenses as deductions, self-employed individuals can claim Standard Deductions to lower their tax bills.
Standardized or itemized deductions are the deductions that every American can claim and reduce his taxable income. Where Standardized Deductions are flat amounts that can be deducted from the Adjusted Gross Income (AGI) as determined by the IRS based on your filing status, itemizing these deductions means claiming these deductions item-by-item, as amounts you have actually spent instead of a flat amount in case of a standard deduction.
It makes sense to itemize your deductions only when the amount of your item-wise deduction is more than the Standard Deductions established by the IRS.
Here’s a list of Standard Deductions that you can claim based on your filings status.
|Filing Status||Standard Deduction for Tax Year 2023|
|Married Couples Filing Jointly||$27,700|
|Single Taxpayers and Married Individuals Filing Separately||$13,850|
|Heads of Households||$20,800|
Say you file returns as a single taxpayer. Accordingly, you can claim a standard deduction of $13,850 and derive your taxable for the year.
Considering the above example, your taxable income would be as follows:
Taxable Income = AGI – Standard Deduction
= $60,000 – $13,850
How to Locate Your 1099 Tax Brackets as a Self-Employment Worker?
Since the taxable income, in this case, comes out to be $46,150, the marginal rate applicable will be 22%. Now, just because you fall in the tax bracket of 22% does not mean that you’re actually paying tax at the rate of 22%.
The US follows a progressive tax system, which means that your income is taxed at different rates. You pay income tax at a marginal rate only on the income that falls into that tax bracket.
What this means is that your marginal rate may be higher, but the effective tax you’re paying is much less. Effective tax is the percentage of your income that is paid towards taxes, whereas marginal tax is the highest tax you pay on your income.
Calculating Taxes on 1099 Income: How to Do It?
As mentioned earlier, a self-employed person is required to pay both federal taxes as per the marginal tax rate applicable and self-employment tax at the rate of 15.3%.
Continuing with the above example, here’s the amount of Federal income tax and self-employment tax you would be required to pay as a Self-employed.
1. Federal Income Tax Calculation
Continuing with the above example, the Federal income tax payable is as follows:
= 10% on the first $11,000 (11,000 x 0.10 = $1100)
= 12% on $33,725; i.e. the income that lies between $44,725 and $11000 ($44,725 – $11000 = $33,725 x 0.12 = $4047)
= 22% on the remaining amount of $1425 ($46,150 – $11,000 – $33,725 = $1425 x 0.22 = $313.5)
Thus, your total Federal Income Tax Payable will be $11,00 + $4047 + $313.5 = $5460.5.
2. Self-Employment Tax Calculation
The SE tax is a Social Security and Medicare Tax for self-employed individuals. This is much like the Social Security and Medicare Taxes of the wage earners that are withheld by their employers.
Who Must Pay SE Tax?
You are bound as a self-employed person to pay SE tax and file Form 1040 Schedule SE if any of the following applies to you:
Your net earnings, excluding church employee income, are $400 or more.
Your church’s employee income is $108.28 or more.
How Much SE Tax Should You Pay as an OnlyFans Creator?
Typically, 92.35% of your net earnings from self-employment (as calculated in Form 1040 Schedule C) are subject to SE tax. The net earnings are deduced by subtracting ordinary and necessary business and trade expenses from the gross income that you earn from your trade or business.
The SE tax rate set by the IRS is 15.3%, which is bifurcated as follows:
- 12.4% for Social Tax
- 2.9% for Medicare Tax
You must also note that the IRS has also kept a cap on the maximum net earnings that are subject to SE tax.
As per the IRS, only the first $160,200 is subject to the Social Security portion of the SE Tax in 2023. This means that if 92.35% of your net earnings exceed $160,200, you must charge 12.4% on $160,200 to calculate the Social Security tax portion of the SE tax and not on your actual net earnings (92.35% x net earnings).
However, all your net earnings (92.35% x net earnings) are subject to the Medicare part of the SE tax. Let’s understand how SE is calculated by taking the above example.
Step 1: Net Earnings Subject to SE Tax
= 92.35% x $70,000 (Net Earnings after deducting business expenses) = $64,645
Step 2: Net Earnings Subject to Social Security Part of the SE Tax
Our net earnings subject to the Social Security part of SE tax as calculated in the above step are $64,645. Since this amount is less than $160,200, the capped limit set by the IRS for the Social Security part of the SE tax in 2023, we will take $64,645 and charge 12.4% on it.
Accordingly, the Social Security part of the SE tax is 12.4% x $64,645 = $8015.98.
Step 3: Net Earnings Subject to the Medicare Part of the SE Tax
The Medicare part of the SE tax is applicable as follows.
- 1.45% Medicare tax on the first $200,000 of employee wages, plus;
- 2.35% Medicare tax (regular 1.45% Medicare tax + 0.9% additional Medicare tax) on all employee wages in excess of $200,000.
0.9% Additional Medicare tax will not apply here as the net earnings in our example do not exceed $200,000.
Since all your net earnings (92.35% x net earnings) are subject to the Medicare part of the SE tax, the Medicare part of the SE tax, in this case, is as follows:
Medicare Tax Part of the SE Tax = 2.9% (1.45% + 1.45%) x $64,645 = $1874.705 ($8015.98 +1874.705 )
Therefore, the SE tax amount payable is $9890.685
Deduction for One-Half of Self-Employment Tax
As a self-employed individual, you can claim a deduction for one-half of the self-employment tax at the time of filing your income tax return with the IRS. Going by the above example, your SE tax deduction would be as follows:
SE Tax Deduction = $9890.685 ÷ 2 = $4945.3425
Thus, SE Tax payable will be $9890.685 – $4945.3425 = $4945.3425
Once you know the total tax amount you owe, the final step is to file relevant returns to pay your taxes. As per the above example, your tax payable is as follows:
Federal Income Tax = $5460.5
SE Tax = $4945.3425
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