What Will I Pay In Taxes If I Receive A 1099? Understanding Tax Obligations As A Self-Employed Independent Contractor, Gig Worker Or Side Hustler

Independent contractors and small-business owners face unique financial challenges, particularly when it comes to managing taxes and planning for the future. The freedom of self-employment brings with it the responsibility of handling tax obligations, such as setting aside money for estimated quarterly taxes, which are necessary if you’re expecting to owe $1,000 or more in taxes for the year.

For 1099 workers, the tax structure includes not only income tax but also self-employment tax, which for 2023 is set at 15.3% of net earnings. This rate comprises a 12.4% Social Security tax and a 2.9% Medicare tax​​. Independent contractors, unlike traditional employees, are responsible for the full amount of these taxes. Keep in mind, you don’t have to do it by yourself.

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The income tax brackets for independent contractors in 2023, meaning the taxes you'll file in 2024, are as follows:

10% Tax Rate:

• Single filers: $0 to $11,000
• Married couples filing jointly: $0 to $22,000
• Heads of households: $0 to $15,700

12% Tax Rate:

• Single filers: $11,000 to $44,725
• Married couples filing jointly: $22,000 to $89,450
• Heads of households: $15,700 to $59,850

22% Tax Rate:

• Single filers: $44,725 to $95,375
• Married couples filing jointly: $89,450 to $190,750
• Heads of households: $59,850 to $95,350

24% Tax Rate:

• Single filers: $95,375 to $182,100
• Married couples filing jointly: $190,750 to $364,200
• Heads of households: $95,350 to $182,100

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32% Tax Rate:

• Single filers: $182,100 to $231,250
• Married couples filing jointly: $364,200 to $462,500
• Heads of households: $182,100 to $231,250

35% Tax Rate:

• Single filers: $231,250 to $578,125
• Married couples filing jointly: $462,500 to $693,750
• Heads of households: $231,250 to $578,100

37% Tax Rate:

• Single filers: $578,125 or more
• Married couples filing jointly: $693,750 or more
• Heads of households: $578,100 or more

Determining how much to save for 1099 taxes involves assessing your self-employment income and expected tax bracket. It’s generally recommended to set aside 20% to 35% of your 1099 income, accounting for any eligible deductions, which can range from office supplies to business travel expenses. 

Eligible deductions for 1099 workers can include:

• Internet and phone bills
• Professional development courses
• Travel and accommodation for business purposes
• Professional memberships and subscriptions
• Equipment or tools specific to your trade
• Legal and professional fees

Maintaining accurate records of these deductions is essential for validation purposes, especially in the event of an IRS audit.

Online self-employment tax calculators can be useful tools for estimating your tax obligations. 

For instance, in California, with a monthly self-employment income of $8,000, considering the state income tax, your total tax liability might be around 28%. This would amount to approximately $26,880 annually, equating to about $2,240 per month.

In Texas, which doesn’t impose a state income tax, with the same income, the tax rate could be around 23.5%, leading to an annual tax liability of around $22,560, or $1,880 per month.

These examples underscore the importance of understanding your specific tax situation and planning accordingly to ensure you meet your tax obligations without any shortfalls.

Tax Credits And Refunds For Self-Employed Individuals

Self-employed people may be eligible for various tax credits and refunds, which can reduce the overall tax burden. Key credits include:

• Earned Income Tax Credit (EITC): This credit is available for low- to moderate-income self-employed people, potentially reducing the amount of taxes owed and possibly leading to a refund.
• Child and dependent care credit: For those paying for child or dependent care while working, this credit can help offset some of these expenses.
• Health coverage tax credit: This helps cover a portion of health insurance premiums for eligible people.

Financial Planning And The Role Of Financial Advisers

A financial adviser can be a significant asset in navigating tax complexities. They offer personalized financial planning, including tax planning, estate planning, retirement and general investing. The goal is to maximize wealth while minimizing risk. For instance, a financial adviser can help create a diversified investment portfolio tailored to your goals and risk tolerance, providing insights on market fluctuations and how they may impact your finances​​.