The Independent Contractor (1099 Employee) Guide to Finances

The Independent Contractor (1099 Employee) Guide to Finances

Hey there, fellow freelancer! Ready to take charge of your finances and make the most of your independent contractor status?

Being your own boss comes with some sweet perks, including tax advantages that can save you serious cash. But let's face it: navigating taxes and financial management on your own can be tricky and, at times, pretty stressful. 

If you feel overwhelmed, you're not alone.

In this guide, we'll clear up all your independent contractor (aka 1099 employee) tax questions and dive into savvy tips and tricks to help you budget and master your money this year and beyond. Get ready to level up your financial game and make your 1099 job work for you!

Who is an Independent Contractor (1099 Employee)?

While freelancers or independent contractors are often referred to as 1099 employees, they technically aren't employees. It's essential to know the difference between contractors and employees, as well as understand your best options for tax deductions and incorporating yourself if you want to make the most money possible.

According to the IRS, an individual is an independent contractor (aka 1099 employee) if the employer has the right to control or direct only the result of the work and not what will be done and how it will be done. This means that independent contractors have no set hours; they work on their own equipment and at their own office or home and just need to deliver a finished product by the deadline.  

Does this sound like you?

About 1 in 10 workers reported being “employed by an employer” while they were actually independent contractors! You are missing out on tax deductions if you do not know the difference.

Approximately 16% of surveyed U.S. adults earned money through digital gig platforms in 2021, while 39% reported having a side hustle. This statistic is a clear testament to the significant portion of the U.S. workforce, ranging from 16% to 39%, that participates in the gig economy in some capacity. With flexibility prioritized post-pandemic, that number could exceed 50% soon.

In practice, many “freelancers” don't technically fit the definition of independent contractor. Sometimes, freelancers are actually “temporary employees” because they show up and leave an employer's workplace during specified hours and work on the employer's equipment. They just do this for a temporary period. So, make sure to understand the distinction.

Related ContentW2 vs 10991099 vs W2 Tax Calculation

Tax Deductions

Ok, let's get into one of the best advantages of being an independent contractor: tax deductions. You can deduct various legitimate business expenses to reduce taxable income each year. 

Properly tracking expenses requires diligent upkeep throughout the year, and it's critical to get organized with financial software such as Quicken Home & Business. This comprehensive tool allows you to manage your personal accounts, business accounts, market investments, and real estate investments all in one application. It also includes built-in invoicing.

Alternatively, a lot of people tend to like Personal Capital (now called Empower) for understanding and planning their finances.

Related Content: QuickBooks vs Freshbooks vs Xero vs Quicken Home Business.

Home Office Deductions

Many 1099 employees operate partially from a home office, designated workspace, or other exclusive area on their personal property. Utilizing a guest room, basement corner, garage workshop, driveway parking area dedicated for signage, or even just a section of a living room or bedroom for administrative tasks like paperwork, video conferences, equipment maintenance, inventory storage, and quick post-job follow-ups can qualify the space as a deductible home office if used regularly and exclusively for the business.

Carefully tracking the total square footage of any home workspace areas used and keeping thorough records of applicable housing bills and expenses contributing to maintaining the office space allows for proper calculation of this deduction. Expert tax pros can help ensure even part-time or shifting workspaces get fully leveraged for maximum home office deduction savings, sometimes thousands per year. 

Equipment, Supplies & Services Deductions

Deductible expenses include everything from laptops, printers, and supplies to advertising and continuing education classes, travel, parking, website fees, phone service, licenses, gifts for clients, and countless other gig work-related costs.

As an independent contractor, you can strategically lower your taxable income. 

Tax deductions that may apply to independent contractors:

  1. Travel Expenses: You can deduct transportation (airfare, mileage, etc.), lodging, meals, and car rental fees when you travel for business. Be sure to keep detailed records of your business-related travel expenses.
  2. Professional Services and Fees: Fees paid to professionals such as accountants, lawyers, consultants, and contractors can be deducted as business expenses.
  3. Health Insurance Premiums: Self-employed individuals, including 1099 employees, can deduct health insurance premiums for themselves, their spouses, and dependents.
  4. Retirement Contributions: SEP IRA, SIMPLE IRA, or Solo 401(k) contributions are tax-deductible for self-employed individuals.
  5. Self-Employment Taxes: You can deduct the employer-equivalent portion of your self-employment tax (Social Security and Medicare taxes).
  6. Advertising and Marketing Expenses: Costs associated with advertising your services, such as website development, online ads, business cards, and promotional materials, are generally deductible.
  7. Professional Development and Education: Expenses related to improving your skills or staying current in your field, such as workshops, courses, books, and subscriptions, can be deducted.
  8. Utilities and Phone Expenses: If you use utilities or a phone for your business, these expenses can be deducted based on the business use percentage.

Meticulously tracking these expenses the moment they occur and retaining either paper receipts or digital images serves as essential documentation to substantiate all deductions later during tax filing. 

Convenient scanning apps like Shoeboxed, Expensify, and Receipt Bank simplify recordkeeping exponentially by automatically capturing, storing, and categorizing receipt data. At the same time, time tracking/invoicing services like Honeybook and And.Co allows seamlessly tagging expenses to specific client projects or 1099 income sources. 

When preparing your returns, consulting with an accountant well-versed in maximizing write-offs for gig workers and self-employed taxpayers can help identify other niche deductions unique to your business activities.

Investing just a few hours upfront to establish a personalized deduction strategy prevents leaving deduction dollars on the table year after year.

Making Quarterly Federal & State Estimated 1099 Tax Payments

Unlike W-2 employees who have income taxes automatically withheld from each paycheck all year long, 1099 employees must strategically budget for and submit quarterly estimated income and self-employment tax payments themselves to avoid penalties.

This requires estimating total annual tax liability based on projected earnings and deductions, then dividing evenly across four incremental payments made yearly.

The IRS 1040-ES worksheet and connected instructions calculate the required payment amounts to sufficiently cover upcoming tax obligations as a freelancer or side hustler without access to employer payroll support.

Staying organized by logging any remittances made via mailed vouchers or convenient electronic payment methods like IRS Direct Pay, PayPal, and others ensures you don't over or underpay each quarter. Apps like Hurdlr and Honeydue also provide handy calculators and reminders for nailing IRS due dates as income ebbs and flows.

Paying taxes incrementally through estimated quarterly remittances prevents the budget shock of owing a lump sum the following April. It also avoids losing access to excess reserves parked for later obligations.

What Determines the Way I Get Paid as an Independent Contractor?

An independent contractor or “1099 employee” can be in business in two ways. They can get paid as an unincorporated 1099 contractor or incorporate themselves and get paid to their corporation. There is potentially a tax difference between the two!

1099 Income

This means a customer contracts you on a project-by-project basis. They don't have you on “W2 payroll” and do not deduct freelance taxes on your behalf.

At the end of the year, the company that hires you reports the amount of money they paid you to the IRS via a “1099.” You would get a 1099 from every customer you have contracted with.

Working this way means you personally “are the business.” Your 1099 income is accounted for on the “Schedule C” on your personal federal tax return (and whatever the similar schedule is on your state return).

Here's the problem(s): having a “1099” or “Schedule C” business does not give you as favorable a tax benefit as this next option below. This setup may fall into the category of Independent Contractor Taxes.

Business Entity Income

This option creates a separate business entity for your freelance business activities.

In layman's terms, this entity has a separate business name and the “INC” or “LLC” designation at the end of it. You likely would also want to get the “S Corp” designation for tax purposes.

Benefits of incorporation:

  1. You will potentially pay less self-employed payroll tax than if you are just a 1099 employee.
  2. You will get the most allowable business deductions available.
  3. You can build business credit that won't appear on your personal credit report and affect your credit score.
  4. You will have the most desirable setup to help employers feel comfortable paying you as an independent consultant rather than via W2 Payroll.

Related Content: How to Incorporate Yourself

Budgeting Strategies For Smoothing Erratic Independent Contractor Income

The dynamic nature of freelance work often involves ebb and flow income cycles for most solo side hustlers and 1099 employees – especially those serving fickle consumer clients or narrow seasonal niches. 

Unpredictable payment amounts and unreliable schedules mandate adopting proactive financial planning tailored to inconsistent gig funds reality rather than vainly forcing inflexible models optimized for biweekly paychecks.

Building Emergency Savings

It all starts with constructing a robust rainy day fund during peak earning periods, equal to 6-12+ months of fixed living expenses based on your lifestyle needs. This creates a buffer, allowing you to weather inevitable downward fluctuations in future income without immediately compromising bill payment abilities or requiring undesirable cuts to recurring obligations.

Budgeting Based on What Flows In

Embrace budgeting systems linking assigned spending to your income whenever it arrives in your bank account. Credit cards also help bridge timing gaps between completing invoice work and when clients remit payments.

Related Content: How to Budget Money 101Personal Itemized Budget Categories & Budget TemplateBest Budget Apps To Fit Your Goals and Lifestyle

Lowering Fixed Costs

Flexibility with the most significant monthly bills makes adjusting for income swings smoother. Where possible, favor discretionary obligations, allowing dynamic increases or reductions as each month's earnings materialize. Solutions like the NinjaCard offer lines of credit without a hard credit check or interest charges designed specifically to flexibly float cash crunches between gig payments. Consider exploring the NinjaCard application for more details and convenience.

Seasonal Independent Contractor Side Hustles

Whenever existing contracts hit slumps, sign up for temporary supplemental remote work gigs on sites like Fiverr, Upwork, and niche industry job boards. Part-time virtual assisting, data entry, customer service, administrative, and technical roles require little experience, yet they bridge income gaps during full-time gig lulls.

Savings Challenges & Cash Back

Bank account savings challenges that gamify stashing spare change or bonuses during surplus cycles provide another fun buffer-building tactic for later dips. Credit card points, airline mile rewards, and lucrative signup bonuses from everyday essential purchases offer hidden value to exchange for cash equivalents when required.

With the right combination of emergency reserves, budgeting flexibility, discretionary debt products, and part-time income padding, smoothing unpredictable gig funds cash flow feels far less stressful.

1099 Employee Disadvantages

One of the disadvantages of full-time freelance work is losing company-sponsored benefits like health insurance, retirement accounts, disability coverage, and paid time off. However, with some strategic planning, securing alternatives to replicate these protections proves quite feasible.

Here are the top insider tips and tricks:

Health Insurance

Explore association group plans specific to your industry, extend workplace policies via COBRA up to 36 months post-employment, compare Marketplace options with partial premium subsidies based on income, or seek boutique packages bundling scaled direct care memberships with supplementary catastrophic coverage.

Retirement Saving

Open low-fee Individual 401k or SEP IRA accounts free of employer plan red tape. These accounts often allow contributions of far higher portions of tax-advantaged income than workplace counterparts could.

Disability Insurance

Secure specialized policies through platforms like Breeze to replace lost wages for months or years should a covered illness or injury prevent working.

Paid Time Off

Stash surplus earnings into dedicated PTO savings accounts monthly to transparently self-reimburse future days off from gig work at your discretion.

Related Content: The Financial Planning Process: Your Route to Financial Independence!


Mastering the ins and outs of managing taxes and finances as an independent contractor (1099 employee) is essential for maximizing your earnings and ensuring long-term financial stability. 

While self-employment may come with challenges, it also offers unique opportunities to leverage tax advantages and take control of your financial destiny. By staying organized, understanding your tax obligations, and implementing intelligent financial practices, you can confidently navigate the complexities of being an independent contractor. 

You can expand your financial toolkit with comprehensive courses that will support your journey as a freelancer. Remember, you're the CEO of you! So seize the opportunity, stay informed, and let your entrepreneurial spirit soar as you build a prosperous future on your terms. Here's to your financial success!