With the cost of living increasing, more people are picking up side gigs to make a little extra money. Working full-time and being self-employed does come with some benefits, but it also comes with more taxes.
Self-employed individuals have to pay federal tax and SE taxes on their income. This means filing extra tax forms and keeping a better eye on your expenses. Luckily, the IRS allows taxpayers to file their 1099 and W-2 forms together.
If you are a 1099 independent contractor, you are considered self-employed, which means you are responsible for paying your taxes directly to the IRS. In contrast, being on a W-2 payroll means you are an employee, and your employer withholds taxes from your paycheck.
The self-employment tax rate is 15.3%, including Social Security taxes (12.4%) and Medicare taxes (2.9%). If you work a 1099 job, you have to pay this tax if you earn over $400 a year. However, you will only receive a 1099 form from an entity if you make over $600.
You can lower your self-employed taxes by writing off business expenses that are “ordinary and necessary” to your work. This lowers your taxable income and you pay less in tax. These deductions are itemized and do not affect federal taxes. If you use FlyFin, A.I. can scan your expenses and easily find every deduction for you.
Self-employed deductions include writing off car mileage, CPA fees, office expenses, internet costs, rent, business meals and travel expenses. The IRS also lets you deduct the “employer portion” of your self-employed tax rate (7.65%) from your federal income tax.
To pay SE tax, you will need a few tax forms. All your earned income and tax deductions should be reported on Schedule C. If you have more than one business, you’ll need a separate Schedule C for each one. You should calculate your tax liability on Schedule SE and then attach these forms to the standard Form 1040.
Small business owners can also use the Qualified Business Income Deduction (QBID) to reduce their taxable income by 20%. To qualify for this deduction, your business must be an S-corporation or a sole proprietorship, both of which fall under the category of "pass-through entities." This means that business income is taxed at the individual level rather than a corporate level, and the employees can avoid paying self-employed tax.
W-2 employees are not eligible for the QBID. This deduction is specifically designed for individuals with 1099 income. The eligibility for the QBID is quite complex, so make sure you check the IRS website before you use the deduction.
If your tax liability for the year is over $1,000, you’re out of luck. A unique aspect of self-employed taxes (that every freelancer dreads) is making estimated quarterly payments. This can be tricky, but an estimated tax calculator simplifies the process.
These payments have to be made on April 15, June 15, September 15 and January 15 of the following year. The IRS is very strict about these deadlines so missing them can result in some heavy penalties.
Here is where having W-2 income comes in handy. You can ask your employer to increase income tax withholding from your current pay to cover estimated payments. All you have to do is fill out Form W-4.
If you are considering this option, just know that your employer risks overestimating or underestimating your tax liability. If they overestimate your owed tax amount, you can end up with less money to take home. If they end up underestimating it, you could get fined by the IRS.
To avoid this, you can use your W-2 income to partly cover your estimated taxes and pay the rest yourself using Form 1040-ES.
Now let’s talk about actually filing your taxes. Form 1040 is where you’ll report your W-2 income and tax withholdings. This is also where you will take the standard deduction or the itemized deduction.
Remember that you can choose to itemize for both federal and self-employment tax as they are unrelated. On Schedule C, you will subtract all your deductible expenses from your gross income (the total income from all your 1099 forms) to find your earned income.
This is what you will calculate your SE tax on in Schedule SE. You will then fill out Schedule 1, where you add your net self-employed income and then add it to Line 8 on Form 1040. Just attach all these forms, and you’re ready to file!
This is the standard procedure when filing your W-2 and 1099 income together, but you may need additional forms if your tax situation is more complicated. You can always ask a CPA if you need a little more help and can write off those fees as a self-employed deduction. It’s a win-win!
FlyFin CPA Team
With a combined 150 years of experience, FlyFin's CPA tax team includes tax CPAs, IRS Enrolled Agents and other tax professionals, offering users the most comprehensive tax advice and preparation.