Independent Contractor Taxes: How Much to Set Aside for 1099

Operating as a freelancer or independent contractor gives you the freedom to work on what you want when you want to. Being your own boss offers numerous benefits, but it's not all upside. There are added tax responsibilities freelancers and independent contractors must address that you might not be familiar with if you're accustomed to working as a traditional W-2 employee.

If you're wondering how much to set aside for your 1099 taxes, use this article to get the insights you need to estimate accurately. Freelancers, independent contractors, and other eligible taxpayers usually set aside 25%-30% of their income, but this is a ballpark. Several factors might help you determine that you must set even more or less of your self-employed income aside for the year to fulfill your tax responsibilities.  

Independent Contractor Taxes: What and How Much Will You Pay?

You must file a tax return if your freelance or independent contract net earnings total $400 or at the end of the year. You will not only file a return on tax day in April, but you'll also be responsible for estimating and filing quarterly tax returns four times a year. 1-800Accountant offers a handy quarterly estimated tax calculator to assist with these estimates. Other self-employment tax calculators are available online to assist with your taxes.

The Internal Revenue Service (IRS) has released tax rates for 2025, including: 

• 37% for incomes over $626,350 ($751,600 for married couples filing jointly)

• 35% for incomes over $250,525 ($501,050 for married couples filing jointly)

• 32% for incomes over $197,300 ($394,600 for married couples filing jointly)

• 24% for incomes over $103,350 ($206,700 for married couples filing jointly)

• 22% for incomes over $48,475 ($96,950 for married couples filing jointly)

• 12% for incomes over $11,925 ($23,850 for married couples filing jointly)

• 10% for incomes $11,925 or less ($23,850 or less for married couples filing jointly)

Self-Employment Taxes

Whether a W-2 employee or a freelancer, you will contribute to Medicare and Social Security programs.

Freelancers and independent contractors do this by paying the self-employment tax. The IRS set the self-employment tax rate at 15.3%, which is the sum of two parts: a 12.4% Social Security tax rate and a 2.9% Medicare tax rate. Your self-employment income is subject to the Medicare tax, but higher incomes are not subject to the Social Security portion beyond a set threshold. In 2024, only your first $168,600 in self-employment earnings were taxed at the Social Security rate. For the 2025 tax year, the Social Security tax threshold applies to your first $176,100 in self-employment earnings.

Employers usually pay Medicare and Social Security taxes through FICA for their W-2 employees. They withhold wages to pay half of the tax and are obligated to pay the other half themselves. 

State Income Tax

The state and local income taxes freelancers and independent contractors may be responsible for can vary by location. Because of your self-employed status, you'll make quarterly estimated tax payments to the federal government four times yearly. Many states that require quarterly tax payments adhere to the same schedule as federal estimated tax payments.

If you have questions about how state tax impacts your tax bill, contact state and local authorities or seek the advice of a qualified tax professional for expert guidance on your freelancer and independent contractor taxes.

Federal Income Tax

You will be responsible for paying federal income tax, which is done via your Schedule C form to report profits and losses. Schedule C consists of five parts: 

• Income. List all business income, including gross receipts or sales, returns and allowances, and federal and state fuel tax credits. This calculates your gross profit and gross income.

• Expenses. Report business expenses such as cost of travel, utilities, insurance, and advertising. Subtract your total expenses from your gross income to find your net profit or loss. Report this result on IRS Form 1040.

• Cost of Goods Sold. If your business doesn't require you to purchase inventory or sell products, this section doesn't apply to you.

• Vehicle Expenses. If claiming deductions for car or truck expenses, complete this section. Keep detailed records of your mileage and vehicle expenses during the tax year.

• Other Expenses. Report any expenses that weren't listed above in the second part. Some of these expenses might include education or costs related to your industry.

You will attach your completed Schedule C to IRS Form 1040 and file your taxes on April 15, 2025. 

Taxes as an Employee vs. Taxes as a Self-Employed Individual

W-2 employees have fewer tax obligations and will only submit their W-2 form in April unless they work a side hustle. They might also have to file a 1099-MISC, 1099-NEC, or other 1099 forms in that instance. If you enjoy relative tax simplicity, working as an employee is a good path to take during your career.

Freelancers, independent contractors, gig workers, small business owners, and other self-employed people have far more tax responsibilities and additional opportunities to reduce their overall tax liability—for example, Social Security and Medicare contributions.

Employers withhold tax on behalf of their employees and must match that amount. Freelancers and independent contractors contribute with the 15.3% self-employment tax, a higher percentage of income than W-2 employees must pay. While employees cannot reduce that contribution via a deduction, self-employed individuals can! Half of that contribution, 7.65%, can be claimed as a business expense and would not count toward your taxable income.

W-2 vs. 1099 Taxes

W-2 employees must file their personal tax returns by the April 15 deadline. While most employees probably aren't concerned with their taxes after tax day passes, self-employed individuals have to be mindful of their tax responsibilities throughout the year. In addition to filing a return on tax day, they must pay quarterly estimated taxes four times per year, keep track of receipts and expenses, and take other critical steps to reduce their taxable income.

Use the following forms to prepare and file your self-employment income with the IRS.

IRS Form 1040

You will file IRS Form 1040, U.S. Individual Income Tax Return. This form reports your taxable income, deductions from all sources, retirement or investment account returns, and self-employment income. Prepare your Form 1040 to calculate your federal taxable income. To determine your federal tax liability, use the tax tables in the Form 1040 instructions or refer to the IRS tax brackets for 2024.

IRS Form 1040, Schedule C

Use Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship), to report your small business activities. Schedule C reflects your self-employment income and associated expenses. The schedule calculates your net income from self-employment. You may need to attach multiple Schedule Cs if you worked different unrelated contractor positions throughout the year.

IRS Form 1040, Schedule SE

Use Schedule SE (Form 1040), Self-Employment Tax, to determine your self-employment tax liability. Schedule SE uses your income from Schedule C to calculate the self-employment tax liability. 

IRS Form 1040-ES

To avoid penalties, freelancers must submit quarterly estimated tax payments.

Use Form 1040-ES, Estimated Tax for Individuals, to estimate your income for the entire year and determine your quarterly tax liability. The form instructions include an estimated tax worksheet for self-employed business owners. Submit your 2025 quarterly estimated tax payments by the following dates.

• First quarter (January 1st – March 31st, 2025): April 15th, 2025

• Second quarter (April 1st – May 31st, 2025): June 16th, 2025

• Third quarter (June 1st – August 31st, 2025): September 15th, 2025

• Fourth quarter (September 1st – December 31st, 2025): January 15th, 2026

W-2 vs. 1099 Deductions

Tax credits pay off a portion of what you owe in taxes, while tax deductions reduce your taxable income. While there are methods to reduce W-2 income, many more deductions are available to freelancers and independent contractors. Maximizing every available deduction and credit will decrease your self-employed tax liability.

Use this list for insights on potential tax deductions you can take to reduce your tax liability.

• Self-Employment Tax Deductions. While being self-employed subjects you to extra taxes, you can claim some tax payments as deductible business expenses. You can deduct the portion of your self-employment taxes that an employer typically pays from your adjusted gross income (AGI).

• Home Office Deduction. Many people work from home, but not everyone can claim a deduction for their home office. You can claim and deduct expenses related to your home office if it is your principal place of business. You must use a specific area of your home exclusively and regularly for work purposes. If you meet those requirements, you can count a proportional amount of your home costs, including utilities, internet, and rent or mortgage payments, as business expenses.

• Health Insurance Premiums. As long as your spouse’s insurance plan cannot cover you, you can deduct your health insurance or HMO premiums from your taxable income using the self-employment health insurance tax deduction.

• Internet and Phone. Depending on your line of work, internet and phone use may be essential for conducting business. You can deduct a portion of the costs for those services according to your proportional business usage.

• Meals or Travel. Travel taken exclusively for business purposes can be deducted. You can claim all your lodging and travel costs as business expenses. 

• Vehicle. If you use your vehicle for a business purpose other than driving to and from a workplace, you can deduct related costs according to its use. With careful records, you can keep track of all your vehicle costs and deduct the qualifying portion. A simplified option for deducting vehicle costs is to add up the miles you drive for business and deduct them according to the IRS’s standard mileage rates.  The standard mileage rate for 2025 is 70 cents per mile.

• Interest. While the principal on many loans can’t be deducted, you can deduct the interest on loans, including your home mortgage, even if you don’t have a home office.

• Education. The IRS views continuing education as a regular and necessary part of many professions. Any money you spend to help you do your job better or keep up with industry developments is money you can deduct for education expenses. This also covers any fees for professional publications or association memberships associated with your self-employment work.

• Insurance. Similar to deductions related to health insurance premiums, you can deduct other qualifying insurance. Do you have a separate insurance policy covering a workplace or work-related need? If so, you can claim those premiums as tax deductions. 

• Workplace Office. If you have an office separate from your home (not a home office), you can deduct the rent and utilities for that office as work expenses. You can also remove any other costs related to maintaining your workplace. Whether you have a separate office or not, you can deduct costs for office supplies, software, or technology used exclusively for your business and most costs related to the staff you employ. 

• Startup Costs. You can claim deductions related to your startup costs if you just started your self-employed business. This includes many one-time expenses in setting up your workplace and establishing your work infrastructure.

Lowering Your Independent Contractor Taxes

Lowering your independent contractor annual taxes is essential to promoting efficient business operations. To do this, prepare early and incorporate your tax considerations into your regular bookkeeping practices and tax software. This will make tax filing easier and help maximize your deductions.

Keep a running list of your itemized deductions, and don’t wait to record a business expense at the end of the quarter or the month's end. Don’t forget to track your receipts, either. You’ll save time and effort by recording the expense immediately. 

Get Expert Guidance to Set Aside 1099 Taxes

Determining how much to set aside for your 1099 independent contractor taxes isn't an exact science, but it can be done. Unfortunately, few self-employed individuals have the time or expertise to implement the processes required for the most accurate estimations. That's why many independent contractors, freelancers, and self-employed workers trust the tax professionals at 1-800Accountant, America’s leading virtual accounting firm, for business tax savings and guidance.

Whether you need business tax preparation, tax advisory, or any of our professional accounting services, we have the affordable solutions you need to ensure your business remains compliant with a minimal tax liability. Schedule a quick consultation–usually 30 minutes or less—to learn how we can help.