Got 1099 income? Here's what to know for your taxes

Maybe you’re driving for Uber, working as an independent contractor or otherwise generating income via a side hustle. If you’re a member of the gig economy, instead of having a W-2 like an employee, your income is reported on a 1099. You still have to pay the piper.

There’s much to know about taxes when you’re self-employed. Here’s a primer.

Understand the self-employed landscape

Many self-employed business owners do not realize that they have to pay “self-employment” taxes in addition to regular income taxes. This tax is basically the employee and employer parts of the “FICA” that W-2 employees/employers have to pay. The tax is generally 15.30% on the first $130,000 of net business income or whatever the “FICA max wages” limit is for the year in question, points out Anthony Viola, a CPA with KVLSM in Woodbury. “Business owners find out when it is too late, if not advised properly by tax professionals or through their own lack of knowledge if they are handling their own tax prep,” he says.

Another thing to consider when reporting income on a 1099 is that write-offs sometimes aren’t worth as much as you might think. “Taking a client out to dinner can certainly be written off as a business activity, but a lot of freelancers don’t know that you can only write off their portion of the meal, not your own. This means if you spend $100 total on the meal and spend equally on yourself and your guest, you would only be able to write off $50,” says Jack Choros, content manager for fintech site cpiinflationcalculator.com.

Know too, that when it comes to writing off your rent, you can only write off the portion of space you use as your office. So if you’re office represents roughly 1/5th of the rooms in your house, you can only write off 1/5th of your rent.

Of special note this year

Make sure you do the math on taking the standard deduction versus itemizing your taxes. With the Tax Cuts and Jobs Act, the standard deductions increased — $12,200 for singles, $24,400  for those filing jointly.  “For a lot of freelancers, the higher standard deduction that came into effect under tax reform is actually a better way to go,” says Leah Bourne, editor of The Money Manual in Brooklyn.

There were a few other changes under tax reform that are important to freelancers, too.

“For instance, familiarize yourself with the Qualified Business Income deduction, which was new last year. That’s the 20% deduction available for pass-through businesses and many freelance businesses are often considered pass-through. If you qualify that’s going to be a big savings,” says Bourne.

Mistakes to avoid

The buck starts and stops with you. “Don’t think you don’t need to report your income if you didn’t get a 1099 from a client. This is a popular misconception among freelancers. The reporting rule placed on the person paying you does not affect your responsibilities. The IRS uses the information to tie the money to your taxpayer number,” says Thomas Williams, author of Deducting the Right Way: Untangling Small Business Accounting & Taxes.

If you’re ever audited, and the income is missing from your tax return, you’ll face penalties and interest. Says Williams, “Always want to report all your income. It helps get you the best offer when you sell your business and makes it easier for you to apply for a loan.”

How to prepare for next year

Choros urges freelancers to use a third-party software to do their bookkeeping throughout the year. “This makes it easier to file taxes in the spring, because everything is accounted for. FreshBooks or QuickBooks are great options.”

Be meticulous about keeping records of your business expenses, income and assets — anything of interest to the IRS. “It is crucial to have excellent records,” says Craig Wild, CPA and managing partner at Wild, Maney & Resnick in Woodbury.

Much as you might not want to, adapt the mindset that taxes should be top-of-mind always, not just tax time. “Tax planning prior to year-end is essential so you have time to make adjustments to reduce your taxes,” says Wild.

You don’t want to over- or under-pay taxes. When you finish this year’s return, don’t shove it deep in a drawer. It’s a road map for next year. 

You may need to pay estimated taxes during the year to avoid penalties; use 2020 Form 1040-ES to calculate your estimated tax for next year, says Ashley Lee, a tax relief expert at BestCompany.com.

Once you know how much you should pay over the year, plan to pay that amount in manageable quarterly installments.  She adds, “Meet with a tax expert early on to help you estimate your tax liability for the upcoming year.”