10 tax tips for 1099 employees, freelancers, and contractors

If you earn income as an independent contractor, freelancer, sole proprietor, or solopreneur, you’ll likely get a 1099 form. Self-employed individuals, or 1099 employees, have tax filing requirements beyond typical W-2 employees. 

For example, you may need to pay estimated self-employment taxes, and you’re responsible for tracking your income and expenses. As a result, you could make unintentional tax mistakes. 

If you want to keep more of your hard-earned money and avoid paying taxes on your 1099 income, take a close look at these seven tax tips for 1099 employees and contractors: 

1. Understand your 1099 forms
2. Write off all your business expenses
3. Don’t try to deduct personal expenses
4. Capitalize on vehicle deductions
5. Keep accurate records
6. Pay your estimated taxes
7. Audit-proof your taxes

1. Understand your 1099 forms

You might receive many types of 1099s forms—each with specific tax-reporting requirements.

The most common types of small business 1099 forms are Form 1099-MISC, Form 1099-NEC, and Form 1099-K. Let’s break down the differences between each. 

Form 1099-MISC: Miscellaneous income

Form 1099-MISC is used to report various types of miscellaneous income that don’t fall under other specific 1099 categories. Some examples include: 

• Rents paid to landlords
• Prize money won in contests
• Medical and health care payments
• Payments to an attorney
• Crop insurance proceeds
• Any fishing boat proceeds

Generally, if you’ve paid someone $600 or more in any of these categories, you need to file a 1099-MISC for them. Individuals or businesses receiving miscellaneous income payments typically get this form, while businesses or entities making these payments send it. This form is also used if you sold $5,000 or more of consumer products directly to someone who plans to resell them, and the sale didn’t happen in a permanent store. 

Form 1099-NEC: Nonemployee compensation

Form 1099-NEC specifically deals with payments made to independent contractors or freelancers for services rendered. If you're a freelancer or independent contractor, this is a form you should receive if you've earned $600 or more from a single client during the year. If you’ve hired someone who isn't your employee and paid them at least $600 for their work, you'll likely need to provide them with a 1099-NEC.

This form ensures that both the contractor and the IRS are aware of this income, which is subject to self-employment taxes.

Form 1099-K: Payment card and third-party network transactions

Form 1099-K reports payments received through electronic means and from credit, debit, or stored-value cards. For example, credit card sales on an online marketplace like Etsy or payments for services via PayPal or Venmo. 

As of 2023, the reporting threshold is $600 in gross payments, regardless of the number of individual transactions. Payment processors typically send this form to both the recipient and the IRS, ensuring transparency in increasingly common digital transactions.

Note: You must file an income tax if you earn $400 or more from self-employment. Your Form 1040 is different from your 1099 forms. Your 1040 form is the individual income tax form both employees and independent contractors use.

2. Write off all your business expenses

One of the perks of being self-employed is the tax deductions for independent contractors. For example, employees can’t write off commuting costs, but if you’re self-employed and you have to drive to a client’s office, you can write the commute off as a business expense.

Self-employed tax deductions can include various business expenses, such as insurance, marketing, and legal fees. You can also depreciate most business equipment that has a useful life of more than one year.  This may include computers, furniture, and machinery. 

3. Don’t try to deduct personal expenses

You can’t deduct expenses that are for personal use, but the difference between personal expenses and business expenses isn’t always clear. For example, if you use your cellphone for personal and business use, the bill is not a tax write-off for 1099 contractors.

Instead, you can deduct part of your bill according to your business use. Say, after tracking your phone usage, you find you use your cell phone for business 50% of the time. You can deduct half of your bill as a tax deduction. 

Your computer, vehicle, and business travel expenses fall under the same constraints, meaning you can only deduct the portion you use exclusively for business. In other words, think twice before writing off the entire cost of an expense unless it’s solely for work.

4. Capitalize on vehicle deductions

If you’re self-employed, there might be times when you have to use your car for business. You can deduct this use as a self-employed tax deduction. 

You can either take the standard mileage deduction or calculate a percentage of the wear and tear on your vehicle from business use. 

You can calculate your business vehicle use in one of two ways: 

1. Actual vehicle expenses method: Start by adding up all of your vehicle operating expenses, such as insurance, gas, repairs, and maintenance. Next, divide the miles you drive for business by the total miles. Multiply that percentage by the total vehicle expenses. 
2. The simplified method: Apply the current IRS-mandated mileage rate to the total miles driven for business in the year. 

Whichever method you choose, you must keep track of all business miles. This can be as easy as jotting down miles, dates, and descriptions in a notebook, or you can use mileage tracking software to keep track of your mileage and avoid any errors.

5. Keep accurate records

Even if you’ve done a great job deducting your allowable business expenses on your taxes, you must also keep adequate records. 

The IRS requires you to keep track of all business receipts as proof. Yes, it takes a little time and organization, but it’s worth the effort in the long run.

When it comes to 1099 income, one of the main causes of mistakes is a lack of organization, which can lead to additional tax payments and penalty fees.

6. Pay your estimated taxes

If you expect to owe less than $1,000 in taxes for the year after subtracting federal income tax, you are exempt from quarterly tax payments. Not sure how much you’ll owe? Use a self-employment tax calculator to estimate your taxes.  

If you owe quarterly estimated taxes, you’ll need to pay them on these due dates: 

• April 15, 2025
• June 16, 2025 (June 15 falls on a Sunday) 
• September 15, 2025
• January 15, 2026

Also, if you have federal tax withholdings—perhaps because you also have W-2 income— you may be exempt from filing quarterly taxes as long as those federal tax withholdings equal 90% or more of what you’ll owe for the year.

7. Audit-proof your taxes

Tax mistakes can lead to fines, penalties, or IRS audits. The IRS uses your taxpayer identification number and formulas to select individuals for audits, which means that everyone has a chance at an audit. However, you can lower your chances of an audit by: 

• Ensuring your reported income matches your tax documents: As an employee, you receive a Form W-2 at the end of the year, but as a contractor, you receive a 1099-NEC form. Match your internal records or accounting software with the forms you receive from your clients.  
• Documenting commonly audited expenses: The IRS will audit some income and expenses more than others—people commonly abuse the system and make mistakes. For self-employed contractors, a few common areas that sound the alarm are auto and home office expenses, 
• Not claiming a hobby as a business: If you sustain a loss for your business for many years in a row, the IRS may claim that you’re pursuing a hobby and not running a business. You’ll need to prove that you had the intent to make a profit and clarify the reasons you didn’t.

If the IRS decides your business is a hobby, they might disallow any business expenses you have previously written off, meaning you could be on the hook for back taxes and penalties.

8. Maximize your retirement contributions

As a 1099 employee, you're responsible for setting up your own retirement savings plan. Consider contributing to tax-advantaged accounts like a SEP-IRA, SIMPLE IRA, or Solo 401(k). These accounts offer substantial tax benefits and can reduce your taxable income while helping you save for the future.

9. Don’t forget your self-employment tax obligations

Unlike W-2 employees, 1099 workers are responsible for paying both the employee and employer portions of Social Security and Medicare taxes. This is called the self-employment tax, and it amounts to 15.3% of your net earnings. It breaks down to 12.4% for Social Security and 2.9% for Medicare. Make sure to account for this in your financial planning to avoid surprises when tax season comes around.

10. Separate personal and business finances

To keep your finances organized and simplify tax filing, open a separate bank account and credit card specifically for business transactions. A designated business account will make it easier to track expenses, monitor cash flow, and avoid mixing personal and work-related expenditures.

Find peace of mind come tax time

Readying yourself for tax season can be a stressful process, but there are tax tips for 1099 employees that make it easier. To make sure you’re ready for tax time, keep your expenses and receipts organized so you can claim the maximum amount of deductions you’re eligible for as a self-employed worker.

A dedicated accounting software for self-employed individuals and solopreneurs can help you stay on top of expense tracking. It can also help you estimate and pay your taxes on time.