1099 With No Taxes Withheld: What to Do Now
For independent contractors, a 1099 with no withholding is standard. Learn how this shifts tax responsibilities to you and how to properly manage your obligations.
Receiving a Form 1099-NEC with no taxes withheld is standard for independent contractors. Businesses use this form to report payments of $600 or more made to non-employees. The absence of withholding does not mean the income is tax-free; it means the responsibility for managing tax obligations is yours. This is common for freelancers, consultants, and other self-employed workers.
Understanding Your Independent Contractor Status
The reason no taxes were withheld is your classification as an independent contractor. An employee receives a Form W-2, which details wages and shows taxes the employer withheld throughout the year. Employers have a legal obligation to handle these withholdings for their employees.
In contrast, as an independent contractor, you are considered self-employed, and the business that pays you is a client, not an employer. Payers are not required to withhold taxes from payments to independent contractors. The Form 1099-NEC you receive is an informational document reporting your gross earnings from that client for the year.
Calculating Your Tax Liability
To determine your tax obligation, you must calculate your net earnings. This begins with your total gross income from all business activities, including amounts from Forms 1099-NEC and any income below the $600 reporting threshold. From this total, you subtract the costs of ordinary and necessary business expenses. Common examples include:
- Vehicle mileage for business travel
- Home office expenses
- Business-related software subscriptions
- Professional fees
- Office supplies
After finding your net earnings, you calculate your self-employment tax using Schedule SE. This tax covers your Social Security and Medicare obligations at a rate of 15.3%. This rate consists of 12.4% for Social Security on earnings up to the annual limit and 2.9% for Medicare on all net earnings. The tax is applied to 92.35% of your net earnings from self-employment.
Your net earnings are then added to any other income to determine your income tax liability. A benefit for self-employed individuals is the ability to deduct one-half of their self-employment tax when calculating their adjusted gross income (AGI), which lowers the amount of income subject to tax.
Paying Your Taxes Throughout the Year
Because taxes are not withheld from your pay, the IRS requires you to pay them as you earn income through estimated tax payments. If you anticipate owing $1,000 or more in tax for the year, you are generally required to make these quarterly payments to cover both your income and self-employment tax liability.
The primary tool for this is Form 1040-ES, Estimated Tax for Individuals, which includes a worksheet to help you calculate your payments. You should estimate your income as accurately as possible to avoid underpayment penalties. If your income fluctuates, you can re-calculate your estimated tax for each quarter.
Payments are due four times a year: April 15, June 15, September 15, and January 15 of the following year. You have several options for submitting these payments, including:
- Mailing a check or money order with a Form 1040-ES payment voucher
- Paying electronically through IRS Direct Pay
- Using the Electronic Federal Tax Payment System (EFTPS)
- Using the IRS2Go mobile app
Reporting Income on Your Annual Tax Return
At the end of the tax year, your financial activities are reported on your annual tax return, typically Form 1040. You will first complete Schedule C, Profit or Loss from Business. On this form, you report your total gross income and list your business expenses to determine your net profit or loss.
The net profit from Schedule C is carried over to Schedule SE to determine your self-employment tax for the year. The result from Schedule SE is then transferred to your Form 1040. The net profit from Schedule C is also reported on your Form 1040 as income and combined with other income sources to find your total taxable income.
The estimated tax payments you made throughout the year are also reported on your Form 1040. These payments are subtracted from your total tax liability to ensure you receive credit. If your payments exceed the tax you owe, you will receive a refund; if they are less, you will owe the remaining balance.