Stepping into self-employment or taking on side gigs means new tax rules. If you receive a 1099 form, especially 1099-NEC or 1099-K, your tax bill looks different than a W-2 employee’s. Here’s a clear, step-by-step guide to calculating your taxes on 1099 income, using the latest IRS rules for 2025.
Understanding Your 1099 Income
When you do freelance work, gig work, or run your own small business, clients or platforms might send you one (or more) 1099 forms. These forms show how much you earned outside of traditional employment.
There are several types of 1099s:
- 1099-NEC: For nonemployee compensation, often used by freelancers and contractors.
- 1099-K: From third-party payment platforms like PayPal or Etsy (if you reached reporting thresholds).
- 1099-MISC: For other types of income, prizes, rent, or royalties.
For 2025, third-party network thresholds have changed. Platforms must now issue a 1099-K if you receive more than $2,500 in payments (down from $20,000 a couple of years ago). This catches many more sellers and gig workers.
Step 1: Gather Your 1099 Forms and Add Up Income
Photo by Nataliya Vaitkevich
Start by collecting every 1099 you received. Check them for accuracy against your own records. Add up all reported income, plus any money you earned that didn’t show up on a form. The IRS expects you to report every dollar.
Step 2: Subtract Allowable Business Expenses
The IRS lets you subtract "ordinary and necessary" expenses from your 1099 income. These can include:
- Supplies
- Equipment and software
- Home office expenses
- Internet and phone bills (business portion)
- Business travel or mileage
- Advertising
- Professional fees (like legal or bookkeeping services)
Use Schedule C on your tax return to list income and deduct expenses. Be honest and document everything.
Tip: Deductible expenses lower your taxable income, which shrinks your tax bill.
Step 3: Calculate Net Self-Employment Income
Your net business income is:
Total 1099 income – deductible business expenses = Net self-employment income
This number drives the rest of your tax calculation.
Step 4: Figure Out Self-Employment Tax
Here’s where things get a bit technical. As a 1099 earner, you pay both the employee and employer share of Social Security and Medicare taxes—a total of 15.3% on net self-employment income (12.4% for Social Security, 2.9% for Medicare).
- If your net self-employment income is over $400, you must pay self-employment tax.
- Use Schedule SE to calculate what you owe.
Example:
If you have $40,000 net income:
$40,000 × 0.9235 (IRS adjustment) = $36,940 is subject to self-employment tax
$36,940 × 15.3% = $5,652
You can deduct half of this ($2,826) from your income on your Form 1040—it’s not a credit, but it lowers your taxable income.
Step 5: Calculate Federal Income Tax
After figuring self-employment tax, it’s time to work out your regular income tax.
- Start with your net income (after business expenses).
- Subtract half your self-employment tax.
- Subtract the standard deduction for 2025 ($14,600 for single filers, more if married filing jointly).
The result is your taxable income.
Use current IRS tax brackets to estimate what you’ll owe. The more deductions (home office, retirement contributions, health insurance), the lower your taxable income.
Step 6: Consider Tax Credits and Additional Deductions
Tax credits can directly reduce your tax bill, so look for:
- Earned Income Tax Credit (if you qualify)
- Child and Dependent Care Credit
- Education credits (if you paid for schooling or student loan interest)
- Health insurance premium deduction (if you’re self-employed)
Credits beat deductions because they cut your tax, dollar for dollar.
Step 7: Don’t Forget Quarterly Estimated Payments
The IRS expects 1099 earners to pay taxes as they go. You’ll probably need to send estimated tax payments four times a year (April, June, September, January). Missing these may bring penalties.
- Good rule: set aside 25–30% of your net earnings for taxes.
- Use IRS Form 1040-ES for payment vouchers.
- Digital tools and apps can help estimate and track these payments.
Step 8: File Correctly and Keep Accurate Records
Use tax software or hire a tax pro if your business gets complicated. Save all receipts, invoices, and statements proving your expenses—even small ones add up.
Important 2025 Rule Changes for 1099 Income
- 1099-K reporting threshold: $2,500 for 2025, so many more people will receive these forms.
- Watch for further changes—thresholds are expected to drop to $600 in 2026.
- Reporting errors trigger IRS notices, so double-check your records against 1099s.
- Online platforms report “gross” income; you must back out returns, fees, and other adjustments yourself.
- No exception for hobby income if you’re regularly selling or offering services.
Final Thoughts
Filing taxes on 1099 income is different—more responsibility, more recordkeeping, but also more opportunities for deductions. Start early, stay organized, and keep track of every dollar in and out.
Set reminders for quarterly payments and consult the IRS website or a tax pro if you’re unsure—especially with new rules rolling out in 2025 and beyond.
The more you know about how 1099 tax works, the less likely you’ll face unwanted surprises at tax time. Get ahead, plan smart, and keep more of your hard-earned income where it belongs—in your pocket.