Business accounting and taxes are a source of much confusion and intimidation for many self-employed workers. Being a self-employed consultant is certainly liberating -- but can also get overwhelming, considering that it requires being a one-person enterprise, responsible for running every aspect of the business.
Between soliciting clients, estimating the scope and cost of each job, and doing the contracted work, staying on top of taxes too can make a freelancer's head spin.
If you are an independent contractor trying to understand how to properly file your 1099 taxes, this article will give you an idea of how it works for self-employed workers -- as well as show you how to significantly reduce the learning curve and the workload that comes with doing one's own accounting by letting the smart Bonsai Tax app do most of the work with minimal maintenance from you.
Note: If you want to make your 1099 consultant taxes much easier and save a lot of money during tax time, try Bonsai Tax. Our app scans your bank/credit card statements to discover deductions as well as remind you of important tax filing deadlines. Users of our software generally save $5,600 on their tax bills. Claim your 7-day free trial here.
What Is A 1099 Consultant?
When it comes to the Internal Revenue Service (IRS), whenever you see the number 1099 in terms like "1099 worker"/"driver/"consultant"/etc., it is a reference to the series-1099 IRS tax forms that are typically involved in the filing of a tax return for self-employed solo entrepreneurs (to be addressed further in the article).
Let's start with the term "consultant" first.
The Distinction Between "Independent Contractor" and "Consultant"
Throughout the article the terms "independent contractor" and "consultant" are used interchangeably, but it's helpful to understand the technical difference between the two.
"Independent contractor" is a legal umbrella term encompassing the wide variety of professionals within the independent workforce in the U.S. Such individuals are classified as "non-employee"/"non-salary" workers because they don't make a commitment to a singular employer but, instead, enter into non-permanent contracts with multiple clients. The relationship between an independent contractor and their client is non-permanent, and non-monogamous, so to speak.
A client can be a large corporation, a small firm, another freelancer who needs help with some aspect of their business and, of course, anyone from the general public that needs a specific service done.
According to the IRS, a professional is considered an independent contractor "if the payer has the right to control or direct only the result of the work and not what will be done or how it will be done". In other words: you are not an independent contractor if your services are controlled by an employer.
Countless professions across a wide range of industries can be -- and are -- performed on an independent basis, for example:
- doctors
- writers
- lawyers
- hairstylists
- semi-truck 1099 drivers and owner-operators
- graphic designers
- online English teachers (e.g. VIPKid)
- veterinarians
- maintenance persons/fixers (including using app-based services as a TaskRabbit contractor)
- insurance agents
- app-based delivery drivers (e.g. DoorDash, Amazon Flex)
- accountants
- psychologists
- dog walkers (e.g. Wag, Rover)
- dentists
- online sellers (e.g. Etsy)
- ride-hail drivers (e.g. Uber, Lyft)
- AirBNB 1099 hosts
Being an independent contractor legally classifies one as "self-employed", subject to paying taxes as a "non-employee worker".
Now, the term "consultant" is more of a non-legal classification of the type of independent contractor work: an expert who consults/advises others on a niche topic they are qualified in. Typically, independent consultants help their clients enhance the positive aspects of a given business as well as solve pains and problems holding it back.
Consultants are hired by companies or private clients in need of an external helper to let them sort / fix things in business or life. Among the most sought-out of independent consulting careers are:
- Marketing Consulting: helping businesses attract attention to their services through content marketing, pay-per-click (PPC) advertising, search engine optimization (SEO), print, radio, and TV advertising, direct response marketing, etc.
- Image Consulting: helping individuals improve how they are perceived in public, from what styles they wear, to how they carry themselves, to how skillfully they communicate with others.
- Social Media Consulting: a business can't get far in the modern marketplace without proper social media exposure. Hence, social media consulting is on the rise.
- Financial Consulting: while not certified accountants, independent financial advisors in the U.S. are required to pass a Financial Industry Regulatory Authority (FINRA) test to officially practice, and are in demand by businesses and individuals in need of financial guidance.
- Career/Life Coaching/Consulting: though sometimes you'll hear coaches say they are different from consultants, in that the consultant is held responsible for results, while with coaching, it is the client who is in control of the outcome, there is enough overlap here to call it consulting.
How Independent Contractors Pay Taxes
As with everything else, there are pros and cons to being an independent contractor -- even in how taxes are handled for self-employed workers vis-à-vis classic "salaried employees".
W-2 Employees vs. 1099 Workers
In the U.S. all income apart from "gifts" is considered taxable income and everyone must pay taxes on what they earn to the IRS on a "pay-as-you-go" basis. But how taxes are paid each tax year depends on what type of taxpayer one is. For example, money earned by W-2 employees is considered a "salary", while money earned by independent contractors is considered "non-employee compensation" -- and this distinction makes a difference in the taxpaying process.
The majority of American workforce is currently comprised of wage and salary workers -- also known as "W-2 employees" (named so for the W-2 IRS form they use to file their tax return).
W-2 salaried employees
A W-2 worker has it easier than 1099 non-employee workers in the sense that they don't have to worry about the calculation and the timely payment of their taxes. All they have to do is instruct their employer (by filling out tax form W-4) what percentage of income taxes to withhold from each paycheck -- and this is automatically done throughout the tax year. All a W-2 employee typically has to do taxes-wise is to file their tax return for the tax year in the April of the following year -- and (if they did it right and overpaid a little) wait for their refund.
1099 contractors
1099 workers In contrast, don't receive an evenly-split paycheck from a singular employer but, rather, have multiple streams of income from different clients paying different sums for differently-sized projects/contracts in the form of pre-taxed income. As such, independent contractors are responsible for calculating and paying tax estimates on their income -- on a specific quarterly schedule provided by the IRS.
1099 workers also are not eligible to receive the types of employee benefits received by salaried workers (most notably medical/health insurance) because, once again, they work for no one but themselves.
However, there are advantages to being a 1099 self-employed taxpayer too!
One is that, unlike W-2 employees, as a freelance worker, you are allowed to contribute quite a bit of money to your solo 401k retirement plan (contributions are capped at $58,000 for the year 2021).
Another substantial advantage of being on the 1099 taxpaying regime is that you are more in control of your taxes -- and can pay fewer taxes because, unlike W-2 employees, you can write off a bunch of business expenses as consulting tax deductions!
There is your gross income (the raw sums you are paid pre-tax and pre-deductions) and, then, there is your "adjusted gross income" (AGI). AGI is what you get after you adjust your gross income down by mathematically "deducting" the necessary costs incurred throughout the tax year that directly benefitted your business from the total. If you put in the effort, you only pay taxes on the resulting lower sum -- which can add up to thousands of dollars in savings.
Typical business expenses that may qualify for self-employed tax deductions for independent consultants include:
- Home office expenses: office furniture and equipment essential to running your business are things you can usually deduct to lower your taxable income.
- Cell phone and internet costs: you may spend a certain percentage of time taking care of business-related communications and research on your smartphone or tablet: a percentage of your cell phone and internet bill may qualify as a deductible.
- Business travel expenses as well as other car expenses may be eligible to be written off. We always recommend you use a travel expense tracker for receipts.
- Educational expenses: sometimes it is possible to deduct the costs of education like classes/workshops related to professionalization needed for your business.
- Marketing/advertising costs: businesses need promotion and you may end up spending considerable money on placing your product/service right in front of your key customer demographic's eyes in physical and virtual space: these costs are tax-deductible.
There are just a few examples but the 1099 deductions list gets longer and there are lots of opportunities to write off quite a bit from your AGI. If you pay attention to your spending, hold on to your business expense receipts, and keep clear and updated records of what you spend on which goods and services, you can save quite a bit of money in taxes!!
As a 1099 contractor, you'll also be paid in full for your services. Unlike a salaried employee who has their taxes withheld from their paychecks, a freelancer will be paid without any withholdings. If they received payments in full via PayPal or Venmo, they would have to pay taxes on their earnings later.
Note: Now, if you are looking for the best tool for the job of tracking and sorting your tax receipts -- one that will automate the majority of these tasks and improve the health of your business accounting in general -- try Bonsai Tax! Claim your 7-day free trial today.
Which Taxes Do Independent Consultants Pay?
Independent contractors, in most cases, are responsible for paying the following two types of taxes.
Income Tax
All taxpayers pay federal income tax. To know the rate at which you are taxed for a given year, you must have an idea of your projected income for that year -- and look up your marginal tax bracket for the specified percentage.
Some U.S. states levy their own state income tax. In some states it's a fixed rate (reset annually), for some it's a graduated rate, and several U.S. states do not collect income taxes at all.
This is rare but, in some U.S. regions, there also exist additional local "county taxes" (put directly toward local community-building efforts).
Self-Employment Tax
1099 Consultants also pay the so-called "self-employment" tax, which is, essentially, how freelancers pay Social Security and Medicare taxes. For the year 2021, the self-employment tax rate is set at 15.3% (which breaks down to 12.4% for Social Security; and Medicare at 2.9%) -- and is to be applied to 92.35% of your net earnings.
Check out Bonsai's free 2021 self-employment tax calculator and see estimates of what you owe for the year.
How Often Must Independent Contractors Pay Taxes?
As mentioned, the "pay-as-you-go" U.S. taxation system requires that self-employed workers make estimated tax payments on a quarterly basis -- if they owe $1000 in taxes for that year, that is (if it's less than $1000, they can wait until filing their tax return to settle what they owe for the year).
Quarterly Tax Estimates
What this means is that, at the beginning of each tax year, you should reasonably estimate how much income you are expecting to earn, divide that number by four, and set aside 30-35% of your income for each of those quarters to send to the IRS by the specified quarterly deadlines.
The due dates for the 2021 quarterly estimated tax payments are:
- January 1 to March 31: to be paid by April 15, 2021
- April 1 to May 31: to be paid by June 15, 2021
- June 1 to August 31: to be paid by September 15, 2021
- September 1 to December 31: to be paid by January 18, 2022 (note: if you file your freelance taxes in 2021 by January 31, 2022, and pay the whole balance due with your tax return, there is no need to pay this fourth installment).
Quarterly estimated payments are submitted to the IRS with the 1040-ES form, though the easiest latest way to do so is through the IRS2Go mobile app.
What Happens When Independent Contractors Don't Pay Taxes In Full Or On Time?
Big bucks or pocket change -- coming in from full-time work or a side hustle: the IRS wants you to pay a percentage in taxes on everything you earn from everything you do. If you under-report, misreport, or altogether fail to report how much money you made each year -- and the IRS catches on -- there will be penalties.
Not only that, they expect you to:
- overpay your estimated taxes -- and will penalize you for underpaying quarterly taxes
- send in your tax payments in accordance with a schedule they set each year -- and will penalize you if your quarterly tax payments are late or if you skip payments (the only time you can skip a quarterly estimate payment is if you covered it in full in the previous quarter's payment)
Filing The 1099 Tax Return
Besides paying quarterly estimates, it is all taxpayers' responsibility to file a tax return by April 15th of the following year. If you miss the deadline, you'll be subject to the 1099 late filing penalty rate.
This is where forms 1099 come into play.
What Are 1099 Tax Forms?
Forms 1099 are "information returns" forms, issued by the payer/client/employer to the independent consultant whose services had been contracted (usually for $600 or more, but sums vary depending on the 1099 form version).
There is a wide selection of 1099s a self-employed worker can be issued. Let us take a quick look at a couple of versions you are most likely to receive as an independent consultant.
- 1099-NEC: this is the most frequently issued standard 1099 form by "the payer" to independent consultants, where the transaction for the job amounted to at least $600.
- 1099-K: if you, as an independent consultant, are making sales through third-party payment methods, like PayPal, credit cards, or freelancing platforms like Fiverr and Upwork that manage client payments on your behalf, you may receive a 1099-K from those intermediaries once you cross a certain threshold of income through sales transactions.
Other 1099 tax forms may apply for various types of independent earnings (for example, 1099-INT for interest earned; 1099-DIV for dividends; 1099-G for collecting money, like unemployment, from the government; 1099-R for payouts from a retirement plan; 1099-S for gains from real estate; 1099-MISC for miscellaneous income that does not fit within the parameters of other 1099 forms).
Under What Conditions Do You Get Issued The 1099 IRS Form?
When you are expected to earn $600 or more from a job, it is the client's responsibility to issue you a 1099-NEC -- as well as send a copy of the same form to the IRS. Ideally, a client is supposed to ask you to fill out a W-9 form around the time of the signing of the contract (if they forget to do so, you can volunteer this form to them). You are supposed to receive a 1099 from the client (which will state how much money you earned from this client) right after the tax year ends, so that you can file it with your tax return in April.
The deadline for issuing a 1099-NEC for the year 2021 is February 1, 2022.
Under What Conditions Do You Issue The 1099 IRS Form?
The above rule applies exactly the same when you contract a freelance worker to do a job that cost you at least $600. As soon as you know you are hiring an independent contractor for $600+, send them an empty W-9 form and ask them to fill it out ASAP. The W-9 form will give you all the information you need to fill out the 1099-NEC, when the time comes to send it to the contractor and to the IRS.
What Happens If I Don't Get A 1099 Form?
If your client sends the 1099 form to an outdated address or, perhaps, forgets to issue one at all, you are, on your end, still responsible for reporting that income to the IRS and paying taxes on it (you still need to report cash income).
This should be easy if you are keeping track of your income (best done with a consultant accounting app like Bonsai Tax): the IRS won't hold the lack of a 1099 form from a client against you if you report that income on the Schedule C of form 1040 of your tax return.
After all, you are required to report 1099 income under $600 too -- without any 1099s to show for it. As long as it all was factored into your quarterly payments and is acknowledged on the tax return, you should be in the clear of any penalties with the IRS.
Make 1099 Self-Employed Taxes A Breeze To Handle With Bonsai Tax
A point worth repeating is that, while you can't avoid paying income taxes altogether, you most certainly can pay fewer taxes, if you write off your business expenses as tax deductions! Our tax software is designed to help independent consultants with this -- and so many other business-accounting-related tasks.
If you only let it, the smart, cloud-based Bonsai software will hit the ground running in taking over the most painful and painstaking parts of sorting, tracking, maintaining, paying, and filing your taxes.
All that's required of you is to answer some questions about your business at the beginning of setting up your account -- and to make sure to document any money that is coming in or going out toward business expenses that are not taken care of by automation.
Just a few things Bonsai Tax can do, as they say, "with its eyes closed and both hands tied behind its back":
- Track your income
- Sort your business expenses into appropriate deductible categories
- Automate importing bank account and credit card data in real-time
- Scan in expense receipts that cannot be automated
- Calculate quarterly tax estimates for every quarter
- Generate "profit and loss" financial reports to keep you on-budget at all times
- Fill out the bulk of your tax return for you when it's time to file
- Do it all through a secure, super-user-friendly, cloud-based interface accessible on all the major devices.
Try it for free for 14 days and experience the functionality and the relief of having the right toolkit for your accounting needs.
Entrust your consulting business bookkeeping to Bonsai Tax -- so that you can focus on what truly matters to you: the great work you do for your clients!
