What is a 1099 employee?
“1099 employee” is actually a common misnomer. Because a 1099 worker is, by definition, not an employee. Instead, they’re an independent contractor.
1099 refers to the form self-employed workers receive from clients to document their earnings. The full name is 1099-NEC, which stands for “Nonemployee Compensation.”
How taxes work for 1099 workers
The roles of 1099 workers vary widely, from Uber drivers to freelance copywriters to plumbers. But they have one thing in common: because they aren’t on a company’s payroll, their earnings aren’t withheld for them throughout the year.
Instead, they’re responsible for paying their own self-employment taxes to the IRS — as well as their federal and state income taxes.
1099 vs. W-2 taxes
Compare that to how taxes work for regular employees — also known as “W-2 employees.” These workers are on payroll, so their companies will deduct taxes from their salaries or hourly wages.
The term “W-2” also refers to a type of tax form. These forms report not only the employee’s annual wages, but also the amount of taxes withheld from their paychecks throughout the calendar year.
If you decide to work a side hustle while keeping your full-time job, you might get both a W-2 and a 1099 when you file taxes.
Taking care of your own taxes can be stressful, but working for yourself comes with a lot of benefits too. Let's dig into some of the perks of self-employment.
What are the benefits of 1099 work?
Setting your own schedule, enjoying career mobility, and getting tax breaks are just a few of the reasons people gravitate towards self-employment.
If you’re thinking of diving into 1099 work, here are a few of the benefits you can look forward to.
The flexibility of being your own boss
The name is in the title: as a self-employed person, your employer is, well, yourself! This means you typically have a lot more flexibility in terms of the work you do — and how you do it.
In general, 1099 workers can expect to enjoy freedoms such as:
- Setting your own work schedule
- Choosing your clients or assignments
- Determining your vacation days
Depending on the type of work you do, you may also be able to choose where you work — whether from home, a coffee shop, or even abroad.
Balancing freedom with client needs
Of course, this will depend on the type of work you’re doing. If you’re an independent contractor in a more public-facing position, like an Uber driver, your work platform — Uber, in this case — may impose certain customer service guidelines on you. But you’ll still get to choose when and where you hit the road.
By the same token, if you’re working on a project for a client, you’ll typically need to agree to things like deadlines and scheduled check-ins. But the key thing is, you’re an equal partner in those discussions. Ultimately, you get to set the deadlines — and cut the clients loose if they’re not on board.
In general, when you’re a 1099 contractor, the emphasis is on the end result, not your process for achieving it.
For many 1099 workers, this flexibility can mean better work-life balance. It lets them structure work around their personal lives, instead of the other way around.
Many 1099 workers have transferable skills that are valuable across many industries. For instance, a freelance writer with a number of real estate clients might use their writing portfolio to branch out into the proptech world — or pivot to nonprofit clients working on affordable housing.
Whether you have multiple areas of interest or just wantto expand your professional horizons, 1099 work can help you diversify your career opportunities.
To make developing your skills even easier, self-employed people can typically write off conferences or courses relevant to their business!
And on that note…
A tax write-off — also called a “deduction” — is a business-related expense you can use to lower your taxable income.
For instance, say a dog walker needs to buy dog treats as part of their independent business. When it's time to file their taxes, they can take the amount they spent on treats and subtract it from their taxable income.
By writing off all their business expenses, they can bring their taxes down by hundreds — even thousands — of dollars.
While expenses vary from job to job, here are a couple of common 1099 write-offs:
- 💻 Your computer
- 📱 A portion of your phone bill
- ✏️ Supplies you use for work
- 🏠 Home office deductions
- 🚗 Vehicle expenses
- 🍝 Meals, if you use them to meet with clients or talk shop
- ✈️ Travel expenses, if you go on business trips
How tax write-offs look in the wild
Let’s put all this into context with an example. Let’s say Carla earned $50,000 in 1099 income as a real estate agent. But to run her real estate business, Carla has to pay for things like:
- Advertising her listings: $2,000
- Vehicle expenses that come with driving her clients to showings: $4,500
- Home office expenses: $2,500
- Office supplies: $4,000
After subtracting these write-offs from her income, Carla’s taxable income is now $37,000. Plug this into an income tax calculator, and you’ll see that her tax bill drops from almost $12,000 to around $7,000 — a whopping $5,000 saved!
These write-offs are a benefit that W-2 employees don’t get. The only problem: Not all self-employed people know what’s eligible. Luckily, you can sign up for the Keeper app. You’ll be paired with a tax assistant who scans your transactions and finds eligible write-offs for you!
The QBI deduction
Hang on! Carla’s actually not done saving money on her 1099 taxes — and neither are you.
As a self-employed worker, she’s eligible for a 20% deduction of her qualified business income (QBI).
Here’s how the QBI deduction would affect Carla’s taxes:
- You’ll remember that after deducting write-offs, her taxable income was $36,000.
- Next, she’ll determine the amount of self-employment tax she owes (15.3%) and subtract half of that from the $36,000.
- The resulting amount is her QBI, and she’ll multiply that number by 20% to calculate her QBI deduction.
Let’s see how those numbers play out:
|Amount||What It Means|
|$36,000||Taxable income after write-offs|
|$2,754||Deduction for self-employment tax|
|$33,256||Qualified business income|
|$6,649||QBI deduction (QBI multiplied by 20%)|
|$26,597||Taxable income after QBI deduction|
From $50,000 to $26,597, Carla has now lowered her taxable 1099 income by a bit over $20,000.
More control over earnings
Sometimes 1099 work comes with instability. Freelancers may go through prosperous periods with more clients than they can handle, but if the tides turn, they can find themselves hustling to secure work.
That being said, not having a set salary means greater control over your earnings. Self-employed people work as many hours as they want. In addition, many are also able to establish their own rate.
Overall, there’s greater potential to control the trajectory of your earnings.
Determining your own metrics of success
When you’re a W-2 employee, you’re often chasing a metric of success that was established for you. As a 1099 worker, you get to decide for yourself what success looks like.
That usually includes happy clients who are satisfied with your work. But your focus doesn’t have to be on exponential growth. Maybe it’s maintaining a small list of good clients and having enough time to travel or pursue other hobbies.
Self-accountability is a big part of thriving as a 1099 worker. So make sure when you set out on a career or self-employment, you take the time to map out what success looks like for you.
Of course, being a W-2 employee comes with benefits, too. But if determining your own success, setting your own schedule, and receiving tax deductions sound like good perks, then 1099 work might be the path for you.
1099 vs. W-2: What should employers consider?
We’ve covered a number of reasons that someone might want to consider taking on 1099 work. But what should employers take into account when deciding who to hire?
If you’re self-employed, and your business starts growing to a point where you need more help, you might have to make this decision yourself.
Both 1099 workers and W-2 employees bring unique value to the table, so there’s no right or wrong answer. It depends on what you’re looking to prioritize.
Here are a few considerations to keep in mind when hiring someone new.
Do you need someone with a specialized skill set to complete a particular project within a defined timeframe? Or will you require these skills over a longer period of time?
The former may be better suited to a 1099, whereas you may want to hire a W-2 for the latter.
It takes longer to interview and train a W-2 employee, while 1099s often just jump into work.
However, once the onboarding is done, W-2s tend to be around for the long haul — offering employers more continuity.
When you hire a 1099 worker, you’re not responsible for paying unemployment taxes or FICA taxes, so the payroll savings can be substantial.
In addition, you don’t have to offer 1099 employees a benefit package or an employer-sponsored retirement plan. Both of these can have high sticker prices, and they also come with additional administration costs.
As a result, though, 1099 workers often charge higher rates because of these employer savings.
How to classify your workers
It’s important to make sure you don’t accidentally misclassify your workers. Historically, some companies have brought on contract workers to avoid payroll taxes and health insurance costs — but then treated them like W-2 employees.
Businesses that get found out for this sort of misclassification are on the hook for all the payroll taxes they should have paid in the first place, plus penalties for evading them.
As long as you’re staying on the right side of the law, there's no wrong answer when it comes to hiring 1099 or W-2: each type of worker comes with plenty of advantages.
Evaluate your priorities on a case-by-case basis, and you can develop the right team for your business needs.
At Keeper, we’re on a mission to help people overcome the complexity of taxes. That sometimes leads us to generalize in our educational content. Please email firstname.lastname@example.org if you have questions.
Is it worth being a 1099 employee? ›
As a 1099 contractor, you receive more tax deductions like business mileage, meal deductions, home office expenses, and work phone and internet costs, as well as other business expenses that can lower your taxable income. Therefore, contractors might end up paying fewer taxes than a traditional employee would.What is the advantage of being 1099? ›
The “benefits” of having a 1099 worker are that the company doesn't withhold income taxes, doesn't withhold and pay Social Security and Medicare taxes and doesn't pay unemployment taxes on what a contractor earns.What is the downside of being 1099 employee? ›
Some of the disadvantages of being a 1099 employee include you must fund 100% of your Medicare and Social Security taxes, health insurance, retirement savings, as well as any tools and equipment needed for your profession.How much should you put back if you have a 1099 job? ›
Generally, the amount you may need to set aside could range from 20% to 35% of your 1099 income, less any deductions that you're eligible to claim.How many hours can a 1099 employee work? ›
1099 employees are considered to be in business for themselves. This means 1099 employees can work for multiple companies at the same time and are not required to complete any set number of hours per week.How much will I owe in taxes as a 1099? ›
The self-employment tax rate is 15.3% (12.4% for Social Security tax and 2.9% for Medicare). The self-employment tax applies to your adjusted gross income. If you are a high earner, a 0.9% additional Medicare tax may also apply.Do 1099 employees pay more taxes? ›
Is it true you pay more taxes as an independent contractor? Unfortunately, yes. There are ways to lower your 1099 tax bill — that's what this article is about, after all! But generally, self-employed people are taxed at a higher rate than someone who works for an employer.What are the pros and cons of being a 1099 employee? ›
Independent contractors have a lot of advantages. They are their own boss, set their hours, and can deduct a lot of business-related expenses come tax time. But there are also some cons, one of which is that they have to pay self-employment tax.Does a 1099 help or hurt your taxes? ›
If you file taxes with a 1099, you must pay that additional 7.65% in taxes. This comes to a total of 15.3% in payroll taxes. Of that total payroll tax, the IRS allows you to deduct between 50% and 57% from your taxable income. This is a significant deduction.Is it better to pay W2 or 1099? ›
1099 workers are responsible for 100% of Medicare and Social Security taxes and generally pay them quarterly while W-2 employees are only responsible for 50% of those taxes and have them taken out of their paychecks automatically. Both types of workers pay an income tax rate based on their tax bracket.