How Much Should I Set Aside for 1099 Taxes? (2022)

Last Updated: August 16, 2022 10 min read
Author: Zach L.

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As an independent contractor it is good practice to set aside 25%-30% of your income for taxes. 1099 workers have more taxes to pay than the average W2 workers.

How Much Should I Set Aside for 1099 Taxes? (2022)

A 1099-MISC is a tax form that reports miscellaneous income. Companies use it to report payments made to non-employees and independent contractors.

The IRS defines miscellaneous income as any income other than wages, salaries, tips, or commissions. This includes interest, dividends, capital gains, prizes, and awards.

Companies use a 1099-MISC form to report payments made to non-employees and every independent contractor. It reports the total earnings of the person during the year in box 7 and the total amount of tax withheld in box 4a. The recipient should use these amounts when completing their own tax return.

It is a tax form used to report income that is not subject to withholding. This includes income from investments, royalties, rents, and other sources. If you receive 1099, it means that you are responsible for paying taxes on the income that is reported on the form. The person who receives 1099 is typically self-employed or has income from sources other than a regular job.

What is the Minimum Amount You Must Set Aside for Taxes?

Taxes are a necessary evil. To utilize your money, it is vital to understand the tax implications of your income and how much you should be setting aside for taxes. Many people don’t know that a lot of information about taxes goes unspoken, and the consequences of not understanding these implications can be very costly.

There is no absolute number that you must put aside for taxes. It all depends on your income level and other factors like retirement contributions, etc.

There are several tax implications to consider when setting aside income for taxes. The first is how much income you should set aside. This can’t be answered easily, as it depends on many factors, including your tax bracket and income type. It makes sense to tally up the amounts of various revenues to arrive at a final total income. You can determine your tax liability using this final figure.

However, a good rule of thumb is to set aside at least 20%-25% of your income for taxes. As a self-employed worker, you should also be prepared to send in quarterly payments to the IRS. That means that every few months is tax time if you are paying self-employment taxes. These quarterly tax payments are necessary to avoid penalties for not paying your taxes regularly. Quarterly taxes do not apply to w2 workers.

You should also consider the type of income you are earning. This can have a significant impact on the amount of taxes you owe. For example, if you earn income from investments, you may be subject to capital gains tax. Alternatively, if you are earning income from self-employment, you may be required to pay self-employment tax. Therefore, it is essential to consider the type of income you are earning when setting aside income for taxes.

Do Self-employed People Pay More in Taxes?

Do Self-employed People Pay More in Taxes?

A self-employed individual generally pays more in taxes than someone who is employed by someone else. This is because self-employed people are responsible for paying both the employer and employee portions of Social Security and Medicare taxes.

In addition, self-employed people may also be responsible for paying state and local taxes and federal income taxes. To calculate your tax liability, you must determine your taxable income and apply the appropriate tax rate.

  • They are also the ones who have to fund their own retirement and healthcare plans
  • Self-employed people also have to pay for their own social security, which employees don’t
  • Self-employed people also have to pay for their own unemployment insurance, which employees don’t

How to Calculate Your Tax Liability From Your Income and Expenses

How to Calculate Your Tax Liability From Your Income and Expenses

To calculate your tax liability from your income and expenses, you need to know what is included in your gross income and the corresponding tax bracket.

The gross income tax brackets are different for every filing status. For example, the first $10,275 of a single person’s taxable income falls into the 10% tax bracket. If you have taxable income over $41,776 but less than $89,075, you fall into the 22% tax bracket.

Here is a breakdown of the different tax brackets for 2022.

Tax Brackets for Single Filers and Couples Filing Jointly in 2022

Tax Rate Taxable Income

(Single)

Taxable Income

(Married Filing Jointly)

10% $0 - $10,275 $0 - $20,550
12% $10,276 - $41,775 $20,551 - $83,550
22% $41,776 - $89,075 $83,551 - $178,150
24% $89,076 to $170,050 $178,151 - $340,100
32% $170,051 - $215,950 $340,101 - $431,900
35% $215,951 - $539,900 $431,901 - $647,850
37% $539,900+ $647,850+

The Tax Brackets for a Married Couple Filing Separately and Head of Household Filers in 2022

Tax Rate Taxable Income

(Married Filing Separately)

Taxable Income

(Head of Household)

10% $0 - $10,275 $0 - $14,650
12% $10,276 - $41,775 $14,651 - $55,900
22% $41,776 - $89,075 $55,901 - $89,050
24% $89,076 - $170,050 $89,051 - $170,050
32% $170,051 - $215,950 $170,051 - $215,950
35% $215,951 - $323,925 $215,951 - $539,900
37% $332,925+ $539,900+

What’s Tax Liability?

Your tax liability is the amount of money you owe in taxes to the government. To calculate your tax liability, you need to know your income and expenses and the tax brackets that apply to you.

What’s included in Income and Expenses?

Your income is the money you earn from working, investing, or other sources. As a small business owner, this could be from a plethora of sources. If you are one of many w-2 employees who moonlight on the side and have a 1099 income you probably have two sources of income. One of the biggest ways to move forward in life is increasing income generation. This can be done by finding a new job, getting a second job, starting a business, or investing more and more.

Expenses are the money you spend on things like food, shelter, and clothing. As a sole proprietorship, you are able to use a lot of business expenses as tax deductions. For example, if you have a space in your home that you use solely for the work that you do as a 1099 worker then you are able to deduct a portion of your mortgage or rent payment that is equivalent to the portion of the building that was used for work. This might not be much money but the name of the game with tax deduction is that every little bit counts. If you can lower your tax burden, then that is more money back in your pocket to grow your business, fix up your house, or go on vacation.

Tax Liability Calculation

Tax Liability Calculation

First, calculate your tax liability by adding up your income and expenses. Then, using the tax brackets, figure out all the tax rates that apply to your income. Finally, multiply your income by the tax rate to calculate your tax liability across each bracket.

For example, let's say that you made $100k this past tax season as a self-employed person and that 100k was your total taxable income. You are on the hook for federal income tax, a self-employment tax rate of 15.3%, and state income tax. A crude tax calculator would be to reference the tables above for the tax rates for a single tax filer, and then we are able to determine that without state income tax you would owe $24,279, which is an effective tax rate of almost 25%!

1099 Tax Forms

There are a few types of tax forms for 1099 income, and they are all important to know about for your federal and state taxes.

  • Form 1099-NEC. This form is to report nonemployee compensation. This form is sent by the payer if they paid someone more than $600 during the previous year. This would be included by the recipient for tax purposes when they file their annual tax return for federal taxes.
  • Form 1099-MISC. This form is to report miscellaneous income. You will receive this form from a payer if you received more than $600 from them in the last year of taxes. The form is due by Jan 31st of the current year.
  • Form 1099-INT. This form is used to report income from interest earned. You will mainly be getting this from your bank for the interest that was paid to you to let the bank hold your money. You will not receive this from your credit card company unless you also bank with them like Chase Bank.
  • Form 1099-DIV. This form is used to report money earned from dividends and distribution income. This could be dividends that are paid from stocks that you own, or from investment in real estate syndications, etc. The major difference between this income and other types of income is that this type is most likely passive.

4 Types Of Taxes Self-Employed People Have To Pay

As self-employed individuals, knowing how taxes work and how much income you should set aside for taxes is essential. It is due to different types of taxes that you will be required to pay depending on the type of business that you have.

  • The first tax is the self-employment tax, social security taxes, and Medicare tax
  • The second tax is the income tax which is calculated on your net income, which includes all your self-employment income and any other taxable income that you may have
  • The third tax is the federal unemployment insurance which is a state unemployment insurance in some states
  • The fourth tax, which many people don’t know about, is called the alternative minimum tax (AMT). This has to do with calculating your taxes differently than regular taxes

Final Thoughts

If you’re self-employed, you’re responsible for paying your own taxes. One way to do this is to set aside 25%-30% of your monthly income to cover your tax bill. You’ll need to file a 1099 tax form at the end of the year to report your income and pay your taxes. There are four distinct types of taxes that you may owe: income tax, self-employment tax, Medicare tax, and Social Security tax. There might be a federal tax. Depending on your income, you may owe all or just a portion of these taxes. The best way to ensure that you’re paying the correct amount of taxes is to consult with a tax professional.

This is not tax advice or legal advice.