How to avoid paying taxes on 1099 income - A guide for the self employed

Did you know that you can skip your tax season panic attack and learn how to avoid paying taxes on your 1099s?

Everyone wants to save money on their tax bill. To legally reduce your taxable 1099 income, you need to know the difference between tax evasion and tax avoidance.

Tax evasion: Illegally concealing income or information from the IRS. This can result in penalties, fines, or even jail time for the worst offenders.

Tax avoidance is legally reducing your taxable income or tax owed. Legal methods you can use to avoid paying taxes include tax-advantaged accounts like 401(k)s and IRAs, claiming 1099 deductions, and tax credits.

Being a freelancer or an independent contractor comes with various 1099 benefits, such as the freedom to set your own hours and be your own boss. However, it can become a serious pain during tax season. That is if you don’t know what you’re doing.

I understand if the mere thought of calculating and paying your self-employment taxes immediately brings you anxiety. Let’s be honest. The only reason you’re jealous of salaried employees is because of the straightforward, quick, and easy W-2 tax forms they get each year.

But remember, you’re in the same boat as around approximately 10.6 million other workers in the U.S. just like you. Keep reading to learn the many ways you can minimize your tax payment as a self-employed individual.

Note: If you want the best way to avoid paying 1099 taxes, try Bonsai Tax for 7 days now. Our automatic tax receipt tracker organizes your deductions, keeps detailed records, and helps you stay on top of deadlines. In fact, Bonsai users typically avoid paying $5,600 from their tax bill at the end of the year. Claim your 7-day free trial here.

1099 types of forms

You’re probably already familiar with the dreaded 1099 form. The common one that freelancers and independent contractors are used to getting from clients is the 1099-MISC form.

In 2020 the IRS changed the 1099-MISC to cover “other” and added the 1099-NEC form to report the income that you receive from clients. The Form 1099-NEC did not replace the Form 1099-MISC, it only took over the non-employee compensation portion.

There are some other common types of forms that are used to report other sources of income. Interest gets reported on Form 1099-INT, dividends on 1099-DIV, government payments such as unemployment compensation on 1099-G, and other miscellaneous sources of income go on a number of other forms (1099-R, 1099-C, etc.).

If a company or client makes over $600 in payments to an independent contractor, they must send you a 1099 before January 31 (it was February 1 in 2024 due to January 1 falling on a weekend). Even if you don’t receive a 1099 form, you are required to report that income before the due date.

You must report income on your tax return if it is less than $600, but the payer is not required to send you an IRS Form 1099-MISC or 1099-NEC.

Understanding 1099 filing process: create, validate, eFile

How to create a 1099 form accurately

Creating a 1099 form starts with gathering the right information about your contractors or vendors. You need their legal name, address, and Taxpayer Identification Number (TIN), usually a Social Security Number or Employer Identification Number. For 2024 filings, the most common form is the 1099-NEC, used to report nonemployee compensation over $600.

Using software like HelloBonsai, QuickBooks, or Tax1099.com can simplify this step by importing contractor details directly from your records. These platforms guide you through entering payment amounts and ensure you select the correct 1099 variant. Double-check all entries for accuracy, as errors can lead to IRS penalties or delays.

To avoid common mistakes, verify your contractors’ information before creating forms and keep detailed payment records throughout the year. Taking these steps early reduces last-minute stress and ensures your 1099 forms are ready well before the January 31 deadline.

Validating 1099 forms before submission

Validating 1099 forms is crucial to prevent IRS rejections and fines. The IRS requires that all TINs match their records exactly, so using the IRS TIN Matching Program is highly recommended. This free service lets you verify contractor TINs before filing, reducing errors significantly.

Many e-filing platforms like Tax1099.com and Track1099 offer built-in validation tools that check for common issues such as missing fields, incorrect amounts, or formatting errors. Running your forms through these checks can catch mistakes that manual reviews might miss.

After validation, review the forms yourself or with a tax professional to confirm all payment details and recipient information are correct. This extra layer of scrutiny helps ensure your filings are compliant and accepted on the first submission.

Steps to eFile 1099 forms efficiently

Electronic filing (eFiling) 1099 forms is mandatory for many businesses and offers faster processing with fewer errors. To eFile, choose an IRS-approved platform like Tax1099.com, Efile4Biz, or HelloBonsai’s integrated tools. These services guide you through uploading your validated 1099 forms and submitting them securely.

The IRS requires eFiling for businesses submitting 250 or more 1099 forms, but even smaller businesses benefit from eFiling due to quicker acknowledgments and confirmation receipts. Most platforms also handle state tax filings, which can save time if you operate in multiple states with specific 1099 requirements.

After submission, keep copies of your filed forms and confirmation emails for at least three years. This documentation is essential in case of IRS audits or discrepancies. Plan your eFiling early in January to avoid last-minute issues and meet the February 29 (paper) or March 31 (electronic) IRS deadlines comfortably in 2025.

Who receives a 1099?

Freelancers and independent contractors

Freelancers and independent contractors receive a 1099 form when they earn $600 or more from a client during the tax year. This form, typically a 1099-NEC for nonemployee compensation, reports the income paid to them so they can accurately report it on their tax returns. For example, if you completed graphic design work for a small business and earned $1,200 in 2024, that business must send you a 1099-NEC by January 31, 2025.

Clients use the 1099-NEC to report payments to the IRS, ensuring freelancers report their income properly. It’s important for freelancers to track their earnings independently, as some clients might not issue a 1099 if payments are under $600 or if the contractor is a corporation. However, all income is taxable, regardless of receiving a 1099.

To stay organized, freelancers should keep detailed records of all payments and request a W-9 form from clients before starting work. This form provides the correct taxpayer identification number (TIN) needed for accurate 1099 filing. Using tools like QuickBooks Self-Employed or Bonsai can simplify tracking and invoicing to ensure you receive and report all 1099 income correctly.

Small business vendors and service providers

Small businesses must issue 1099 forms to vendors and service providers who are not employees but have been paid $600 or more for services during the year. This includes professionals like accountants, consultants, repair technicians, and marketing agencies. For example, if a small business pays a local IT consultant $750 in 2024, the business is required to send a 1099-NEC to that consultant and the IRS.

It’s important to note that payments for goods or merchandise typically don’t require a 1099, only payments for services. Additionally, payments to corporations generally do not require 1099 forms, except for specific cases like legal services. Small businesses should collect W-9 forms from all vendors to ensure they have the correct information for 1099 filing.

To avoid penalties for missing or incorrect 1099 filings, small businesses can use accounting software like QuickBooks, Xero, or HelloBonsai’s tax tools. These platforms help track payments and generate 1099s automatically, making it easier to comply with IRS deadlines and requirements.

Landlords and individuals paying rents or prizes

Individuals or businesses who pay $600 or more in rents, prizes, awards, or other income payments during the year may need to issue a 1099-MISC form. For example, if you rent out office space and pay a landlord $1,200 annually, you must send a 1099-MISC to report those rental payments. Similarly, if you award cash prizes or payments for services, these may require 1099 reporting.

This requirement applies even if the payer is not a business. For instance, if you hold a contest and award a $1,000 prize to a non-employee, you must issue a 1099-MISC to report that payment. However, personal payments like gifts or payments to employees are excluded from 1099 reporting.

To handle these situations correctly, keep detailed payment records and request W-9 forms from recipients. Using tax preparation software or consulting a tax professional can help ensure you meet 1099 filing obligations and avoid IRS penalties in 2024 and beyond.

What is a 1099 form?

Understanding the purpose of a 1099 form

A 1099 form is a tax document used to report income earned outside of traditional employment. It is primarily issued to freelancers, contractors, and small business owners who receive payments for services or goods. Unlike a W-2, which reports wages from an employer, the 1099 reports non-employee compensation and other types of income to the IRS.

For example, if you worked as a freelance graphic designer and earned $5,000 from a client in 2024, that client is required to send you a 1099-NEC form if they paid you $600 or more. This form helps the IRS track income that might not be subject to withholding taxes, ensuring freelancers report their earnings accurately.

Knowing the purpose of the 1099 form helps you stay compliant and avoid penalties. Always expect to receive a 1099 if you earn over $600 from a single client, and use it as a basis for reporting your income on your tax return.

Different types of 1099 forms freelancers should know

There are several types of 1099 forms, but freelancers and small business owners most commonly encounter the 1099-NEC and 1099-MISC. The 1099-NEC reports non-employee compensation, such as payments for freelance work, while the 1099-MISC covers other income types like rent, royalties, or prizes.

For instance, if you rent out equipment for your business, you might receive a 1099-MISC for rental income. In contrast, if you provide consulting services, your clients will send you a 1099-NEC. Both forms must be filed with the IRS and provided to you by January 31, 2025, for the 2024 tax year.

Understanding which 1099 form applies to your income helps you organize your tax documents and prepare accurate returns. Use tax software like TurboTax or QuickBooks Self-Employed to track different 1099 income types and avoid confusion during tax season.

How to handle 1099 forms when filing taxes

When you receive a 1099 form, you must report the income on your tax return, even if you did not receive a physical copy. The IRS also receives a copy, so discrepancies can trigger audits. Use the information on the 1099 to complete Schedule C for business income or Schedule E for rental income.

For example, if you earned $10,000 as a freelancer and received a 1099-NEC, enter that amount on Schedule C to calculate your net profit or loss. Remember to deduct eligible business expenses to reduce your taxable income. Filing your taxes accurately with 1099 income helps you avoid penalties and ensures compliance with IRS rules.

To simplify this process, consider using accounting tools like HelloBonsai or FreshBooks, which can import 1099 data and help you track expenses. Staying organized throughout the year makes tax filing easier and reduces stress when deadlines approach.

How to lower your taxable income as a 1099 self-employed worker

If you are self-employed or a small business owner, you understand how high your tax bill can be, especially with the 15.3% self-employment tax added on. This consists of 12.4% for Social Security on the first $168,600 of earned income in 2024 and 2.9% for Medicare.

When you’re not an employee, you don’t have any Social Security and Medicare taxes withheld from your income.

When you’re not an employee, Social Security, Medicare, state, and federal income taxes are not withheld from your paycheck. You are solely responsible for paying self-employment tax. Most individuals working full-time expect a tax refund, but you must pay taxes on 1099 income.

Thankfully, there are plenty of things you can do to avoid outrageous quarterly tax payments and yearly tax payments.

Here are a few ways to keep extra money in your pocket when you receive a 1099.

Keep an eye on your 1099 business income

W-2 employees have it easy when it comes to tracking their yearly income. Their employer does that on their behalf. On the other hand, independent contractors need to record your business income or earnings in as much detail as possible so you can easily calculate your net income and determine your taxes.

Record all 1099 business deductions

The more you track tax deductions and the more organized you are, the better you’ll be during tax season. Remember, you are responsible for paying "both sides" of the self-employment tax. When you know your expenses and accurately track them, you will understand what tax deductions you can get and can maximize them. Simply follow the Schedule C instructions to claim your tax deductions.

Note: It’s critical to separate business expenses from personal ones, as you don’t want to merge the two accidentally. If you want to do all of that automatically, try Bonsai's freelancer 1099 expense tracking software. Our tax software can help you organize all of your expenses and save you money on your tax bill at the push of a button.

Understand when to switch your 1099 business structure

Many self-employed people have LLCs, but some wonder if they should make the S-election so their LLC is treated as an S-corp. It depends on your situation. If you’re making over $100,000 each year, have a tax professional help you identify if there’s any benefit to forming an S-corporation.

Take advantage of 1099 self-employment tax deductions

"Few of us ever test our powers of deduction, except when filling out an income tax form.''
- Laurence J. Peter, author

Fortunately, when you’re self-employed, you’re qualified to write off a variety of business expenses to lower your tax burden. Taking as many self-employed tax deductions as possible can help lighten your load. But what exactly can you deduct?

There are many costs that 1099 workers can deduct from their self-employment income taxes, including educational training, office supplies, advertising, and travel.

Take a look at the following common deductions for self-employed folks and those who own their own small businesses.

Gas Mileage and Vehicle Expenses

You can claim a deduction on your gas and vehicle expenses from your taxes if you use your vehicle for work purposes. Regular W-2 employees are unable to deduct their commute from their taxes, no one can deduct their commutes.

This can be done in two different ways: the standard milage rate or actual expenses.

Using the Standard Rate

In the standard rate method, you will first need to figure out how many miles you’ve driven for business purposes (and personal purposes, if it's a mixed-use vehicle) throughout the year. Then, multiply that number by the standard mileage rate given by the Internal Revenue Service (remember that this changes each year). This is how you claim mileage for taxes to lower your tax liability.

Example: You drove 10,000 miles in a year for business. The 2024 standard mileage rate is 65.5 cents per mile. The equation would be: 10,000 miles x $0.655 (standard mileage rate) = $6,550 total tax deduction.

Tracking Actual Expenses

You can also choose to write off your actual business vehicle expenses. Rather than using the IRS standard mileage rate, you will record all the expenses you had throughout the year.

If you had a pricey vehicle repair and know your actual expenses will be high, you may want to opt for the actual expenses method, as you’ll receive a larger tax break.

These types of expenses usually consist of:

• Gas
• Maintenance and repairs
• Insurance
• Registration fees
• Lease payments or depreciation

• Gas Cost
• Vehicle Insurance
• Vehicle Registration
• Vehicle Maintenance and Repairs
  

Example: You drove 5,000 miles in a year for business but drove a total of 25,000 miles. Divide 5,000 by 25,000 to get the percentage you drove for business (20%).

Let’s say your vehicle expenses were $6,000. Multiply this number by your percentage of 20%, and you’ll get the amount you can deduct. In this case, you would be able to deduct $1,200.

Health Insurance

Sadly, as an independent employee, you won’t receive a comprehensive benefits package like you would if you worked a W-2 job. But before you start freaking out, know that you’ll still get some perks that can make up for it.

Self-employed workers can deduct their health insurance expenses, including medical, dental, and long-term care insurance. This lowers your adjusted gross income (AGI), reducing the amount of taxable income you pay taxes on.

However, you can only do this if you meet certain IRS requirements:

• You are self-employed and have a net profit from your business
• You are not eligible to participate in a subsidized health plan through your employer or spouse's employer
• You paid the health insurance premiums during the tax year

• You are paying for your own health insurance premiums.
• You aren’t eligible for your spouse’s employer’s plan.

Internet and Phone Expenses

Everyone does business online or by phone these days, making for a perfect tax deduction for those who are self-employed.

All you’ll have to do is determine what percentage of time you use your phone and internet for business purposes. Then, figure out how much you’re paying for that amount of time. This number is your internet and cell phone deduction.

Example: You log 2,000 hours of computer use in a year. 500 of these hours were used for your business. This means ¼ of your internet expenses are deductible.

If you spend $50 each month on internet service ($600 per year), you can take $600 and multiply it by .25. After calculating, you’ll discover that you can write off $150 of your internet expenses for the year.

Home Office or Office Space Rental

Self-employed people often work remotely at home or rent out an office space for themselves. If you rent space, you can deduct your monthly rent payment and any equipment you rent.

If you work out of a home office, you can potentially write it off. However, this is a bit more complicated and involves a few requirements. But it can be done.

The standard method and the simplified method both require exclusive business use. In the standard method, you’ll need to determine your home office expenses, making sure to track everything in great detail.

With the simplified method, office space shouldn't exceed 300 square feet. You’ll need to multiply the square footage of your home office space by the IRS rate. The IRS uses $5 per square foot to calculate your deduction.

Marketing and Advertising

Chances are (depending on your business), you’ll want to start advertising your products or services to the world. After all, how is anyone supposed to know how awesome you are if they don’t know who you are or what you offer?

Maybe you paid for a seasonal Facebook ad campaign or created an online course to further promote your expertise. First off, congratulations on successfully marketing your company! We’re happy to inform you that you can write these things off as a business expense on your taxes.

As with all business expenses, make sure to keep track of the amounts you paid, what you paid for, and when you paid. This will help you stay organized and will eliminate stress during tax time.

Contact a tax professional to avoid paying independent contractor 1099 taxes

Completing your yearly taxes can be frustrating and a little scary, but it doesn’t have to be. If you take the time to examine your possible deductions, keep track of your expenses (you can easily do it with our tax document organizer) and business income in detail, and remember to take a deep breath, you’ll be just fine.

If you don’t trust yourself, the best thing to do is to ask the experts who use comprehensive checklists and turn to a tax-focused program for assistance with your taxes. With professional help, you’ll improve your chances of lowering what you owe and avoiding an audit by the IRS during tax time.

Are you ready to stop stressing about your freelance or independent contractor finances? With its seamless, integrated, and automated tax software, Bonsai could be the solution you’ve been searching for. From expense tracking and income reporting to estimated tax planning and much more, taxes will be a breeze!

Start using our accounting software for freelancers for free today and enjoy peace of mind when tax season rolls around. Our app sends you filing deadline reminders, estimate taxes and discovers tax write-offs automatically so you can avoid paying taxes. Try a 7 day free trial today.

1099 frequently asked questions

What counts as a 1099 business expense?

Business expenses are ordinary and necessary costs obtained through business practices, whether you’re a small mom-and-pop shop or a giant corporation. If you paid for something that helps your business make a profit, that’s a business expense and may be tax-deductible (with certain specific exceptions such as clothing for work and additional Medicare taxes).

What are estimated taxes?

Estimated taxes are quarterly payments that cover your income tax, self-employment tax, and alternative minimum tax. Self-employed individuals, sole proprietors, partners, and S-corporation business owners pay these each quarter to prevent being charged a penalty by the IRS.

Non-self-employed individuals may also pay estimates if they've under-withheld or have significant other income.

How do I know if I need to pay estimated 1099 taxes?

You must pay estimated taxes if:

• The amount of income tax withheld from your salary or pension is not enough.
• You acquire income from interest and dividends, alimony, self-employment income, capital gains, prizes, and awards. While not a requirement, they may be a reason you might underpaid your payments.
• You expect to owe at least $1,000 or more in taxes after you file your return.
  

How to pay self-employment taxes on your 1099 form?

Determine your net income (gross income minus your expenses). You owe self-employment taxes if you earn a net profit of $400 or more. For up to $160,200 of earned income in 2024, the self-employment tax rate is 15.3%. You can calculate your self-employment tax using Schedule SE on IRS Form 1040. Follow Form 1040 instructions to calculate what you owe after the tax year.