Freelancing and Form 1099-NEC: Everything You Need to Know

Independent contractors, freelancers, sole proprietors, self-employed individuals, and gig workers.

No matter what you call it, earning an income from something other than a full-time job is booming in the United States. According to statistia.com, 73.3 million Americans call themselves freelancers, up from 57.3 million in 2017.

While freelancing offers significant benefits not available for full-time employees, such as  greater schedule flexibility, working for yourself also comes with new responsibilities. One of the most eye-opening responsibilities for new (and current) freelancers is being completely responsible for your tax situation.

The first place you should start when trying to understand taxes for independent contractors, freelancers, and gig workers is learning about the tax forms you'll need, including Internal Revenue Service (IRS) Form 1099-NEC.

What is a 1099-NEC Form?

If you work as a contractor or freelancer, you’ll likely receive a 1099-NEC form come tax time. This 1099-NEC form shows the total amount of money you received from this business in the 2023 tax year.

Form 1099-NEC is one of three different types of 1099 tax forms you’re likely to see as a contractor or freelancer:

• IRS Form 1099-NEC

NEC is an acronym for “nonemployee compensation,” which is exactly what it sounds like. If you receive more than $600 in compensation from a business but aren’t an employee, you’ll receive a 1099-NEC showing how much you made during that calendar year.

• IRS Form 1099-MISC

MISC stands for “miscellaneous.” Think of a 1099-MISC as a hodgepodge of all the other types of income you could receive from a business or an organization: rental income, prizes or awards, medical or health care payments, crop insurance proceeds, and certain legal proceeds such as settlements are all reported on a 1099-MISC. If you receive over $600 in any of these miscellaneous categories, you should receive a 1099-MISC.

• IRS Form 1099-K

A 1099-K shows the payments you receive from third-party payment platforms such as PayPal, Venmo, and credit card companies. Prior to 2023, you would only receive a 1099-K if you were paid more than $20,000 AND had a total of 200 or more transactions from one of the payment processors. Starting this year, this $20,000 threshold has been lowered to $600, while the transaction requirement has been eliminated. So, if you accept any form of electronic payment, there’s a good chance you’ll receive at least one 1099-K when it comes time to file your return for the 2023 tax year.

A reminder about the $600 threshold: Just because you don’t receive a Form 1099-NEC doesn’t mean you don’t have to include this income on your federal income tax return! Blank forms may be found on the IRS website.

You’re required to report ALL income you receive, from whatever source derived, on your tax return.

1099-NEC form: Background

As mentioned in this article’s introduction, you’re now responsible for your entire tax universe as a freelancer, Form 1099-NEC included. But what does this exactly mean?

To answer this question, let’s start by reviewing the tax situation for a full-time or part-time employee, and then we’ll compare it to the tax situation for a freelancer.

Tax Situation for an Employee

An employee never has to make a payment to the IRS to pay taxes.

Each time an employee receives a paycheck, the employer withholds a certain amount of money representing the income tax, Social Security tax, Medicare tax, and state & local taxes (if applicable) for that employee.

Having withheld the employee’s taxes from their paycheck, the employer - not the employee - sends this money to the IRS on behalf of the employee.

Filing a tax return for an employee

Every January, an employee receives a Form W-2 from their employer showing the total amount of all the paychecks received during the previous year. The employee fills out their tax return using information from their Form W-2 and other tax documents.

After filing their tax return, an employee - in theory - shouldn’t owe the IRS any additional money, nor should they receive a refund. The amount of money withheld from the employee’s paycheck should be equal - or pretty close - to the actual amount of taxes owed for that year.

Now, let’s compare what an employee goes through with their taxes to what a freelancer must deal with.

1099-NEC form: Tax Situation for a Freelancer

There are many moving parts to a freelancer’s tax situation. Here are the most important areas you should know about:

Estimated tax payments

A freelancer must calculate the estimated tax owed to the IRS four times per year. The filing deadline may vary from year to year. Here are the due dates for these estimated tax payments:

• April 15 - Due date to pay taxes on taxable income earned in January, February and March
• June 15 - Payment due date for April and May estimated taxes
• September 15 - Payment due date for June, July, and August estimated taxes
• January 15 - Payment due date for September, October, November, and December estimated taxes
• NOTE: If a due date falls on a weekend or a holiday, your payment is considered on time if it is made no later than the next business day.

Common types of taxes paid

The estimated tax payments a freelance taxpayer must make cover four main types of taxes:

• Income tax. An income tax of up to 37% is due on your taxable profit.
• Social Security tax. A tax of 12.4% is due on your first $160,200 of taxable profit in 2023.
• Medicare tax. A tax of 2.9% is due on all your taxable profits.
• State and local taxes. Don’t forget about state and local taxes, if applicable. Many states follow the federal estimated tax payment due dates, but do double-check to confirm your specific payment deadlines.

Other types of taxes

If your income is high enough, you’ll owe an additional 0.9% Medicare surtax and a 3.8% tax on certain investment income. If you sell an asset at a gain, you’ll owe a capital gains tax of up to 25%.

Payments may be made in person, by mail, or electronically.

How a freelancer can stay out of tax trouble

With so many types of taxes and deadlines to meet, it may seem a bit overwhelming to understand your responsibilities as a taxpayer. If you follow these 3 tips, though, you’ll be in great shape.

1. Set aside money every week to pay taxes. Hopefully, you budget for everything else you spend on…taxes should be no different. Consider setting aside a flat percentage of every payment you receive, for example, 20% or 30%, to cover all the taxes you must pay.
2. Know your deadlines. Now that you’re setting aside money on a regular basis to pay your taxes, make sure you don’t miss the payment deadlines. Consider putting your tax payment due dates on your calendar for the next 12 months. If you’re late with a payment, you may be required to pay penalties and interest in addition to the tax you owe.
3. Ask for help. Remember that you’re never alone if keeping up with your taxes starts to become overwhelming. Asking for help is just an email or phone call away.

Work With the Small Business CPA Experts to File Form 1099-NEC

Whether you need to fill out and file Form 1099-NEC, file taxes, obtain an EIN (your business's taxpayer identification number), or prepare a tax return, the CPA experts at 1-800Accountant, America's leading virtual accounting firm for small businesses, can help.

We offer services with affordable pricing for most independent contractors, freelancers, and all other types of gig and self-employed workers. Schedule a short consultation to learn how we can help with your accounting and tax needs so you can focus on your work!