Form 1099 NEC & Independent Contractors Internal Revenue Service

You can learn more about who should pay quarterly taxes on the IRS’s estimated taxes info page. Self-employment tax is a tax that independent contractors pay in addition to their income tax. This tax is used to fund Social Security and Medicare, which are typically paid by employers on behalf of traditional employees. Tax forms like the W-9 might be confusing, but a little preparation goes a long way. By ensuring compliance, avoiding penalties, and expediting tax time, understanding and properly utilizing Form W-9 can benefit both businesses and independent contractors. Therefore, regardless of whether your business regularly hires employees or independent contractors, become familiar with the W-9 to make tax season easier.

How to Calculate Your Income Tax

The first step after hiring an independent contractor is to send them a copy of the W-9 Form. This form is used to obtain a contractor’s tax and financial information. Once filled out, the contractor should send the form back to you and your business. You’ve assembled all your documents and filled out all your forms. The IRS explains all your filing options, including a list of IRS-approved electronic filing options, such as tax software companies like TurboTax and H&R Block.

Start Your Business with a Nevada LLC

Use the income or loss calculated on Schedule C to calculate the amount of Social Security and Medicare taxes you should have paid during the year. The instructions for Schedule SE PDF may be helpful in filing out the form. A 1099 contractor is self-employed and responsible for their own taxes, while a W-2 employee has taxes withheld by their employer and receives employee benefits. Think of it as a receipt from the business to the IRS that confirms how much they paid you. You’ll use this form when ledger account you file your taxes to report your earnings accurately.

Discover how we helped an international tax firm streamline year-end filing.

Just fill in the necessary details, and you can download or print the completed form right away. Let’s go over how to get W-9 and 1099 forms and how PaystubHero simplifies the process for issuing 1099-NEC forms. The IRS uses the 1099-NEC to see how much you earned, so not reporting this income could lead to trouble, like fines or audits.

How Much Money Should I Set Aside for Taxes as an Independent Contractor?

This is the simplest and most common structure for independent contractors. Sole proprietors are personally liable for all business debts and obligations, and their business income is reported on their personal tax return. Just like regular employees, independent contractors must also pay federal income tax and, where applicable, state and local taxes.

You need to pay estimated taxes quarterly in April, June, September, and January. However, there are ways you can minimize how much of your self-employment income goes to the IRS. FICA consists of your federal Social Security tax (12.4%) and Medicare tax (2.9%), for a total self-employment tax rate of 15.3% of your net business income. It checks their TIN and makes sure they are exempt from backup withholding.

State rates and structures vary depending on your residence or where you earned the income. Some states have a flat tax rate, while others have a progressive tax system. Depending on the business’s location, you may also be subject to local taxes based on the business’s location. Employees satisfy this requirement by having their employers withhold taxes from their paychecks. But independent contractors must make estimated quarterly payments on their own—if they expect to owe taxes of $1,000 or more when they file their tax returns.

• Backup withholding is a tax deduction that occurs when independent contractors provide the wrong TIN or incorrectly report their income on a tax return.
• If that’s your situation, it’s important to know which independent contractor taxes you need to pay and how to pay them, so you won’t get a nasty surprise during tax season.
• That means no federal or state income taxes, Social Security taxes or Medicare taxes are taken out before you receive the money.
• Additionally, self-employment tax is a significant consideration as it covers Social Security and Medicare contributions, which are essential for your long-term financial planning.
• While it is not directly filed by the contractor themself, it is important to be aware.

Gather Necessary Information

You must file with the IRS and furnish to the contractor by February 2, 2026, for TY 2025 payments. If you file 10+ total information returns across types (W-2s + any 1099s, etc.), you must e-file. In order to report Bookkeeping for Startups your Social Security and Medicare taxes, you must file Schedule SE (Form 1040 or 1040-SR ), Self-Employment Tax PDF.

Limited Liability Corporation (LLC)

The dividends you earn on investments like stocks also require a 1099. You may receive a 1099 form from a client during tax season if you’re a freelancer or independent contractor. You’ll likely receive many 1099s if you work with multiple clients. Just keep in mind that you may need to make estimated state income tax payments, and those rates and deadlines vary by sub contractor tax form state.