Are Consulting Fees Taxable? How to Report Your Income
This guide clarifies tax responsibilities for consultants, from calculating net income after expenses to fulfilling filing and payment requirements.
Consulting fees are taxable income for the individual or entity receiving them. This income encompasses payments for professional advice across various fields, such as management, technology, or finance. When you operate as a consultant, you are considered self-employed by the Internal Revenue Service (IRS), and all revenue from your consulting activities is subject to taxation, including direct fees, awards, or prizes.
Tax Obligations for Consultants
As a consultant, your earnings are subject to both federal income tax and self-employment tax. Federal income tax is calculated based on your total taxable income, which places you into specific tax brackets. The income you earn from consulting is added to any other income you may have to determine your marginal tax rate.
The self-employment tax is a combination of Social Security and Medicare taxes. For 2024, the rate is 15.3% on net earnings, composed of 12.4% for Social Security up to an annual income limit of $168,600, and 2.9% for Medicare with no income limit. For 2025, the Social Security wage base is set to increase to $176,100.
Unlike traditional employees, who split these tax payments with their employer, self-employed individuals are responsible for paying both the employee and employer portions. This is why the self-employment tax rate appears higher than the FICA rate for employees. However, you can deduct one-half of your self-employment tax when calculating your adjusted gross income (AGI), which slightly lowers your income tax liability. Beyond federal obligations, most states and some localities also levy an income tax on your consulting income.
Calculating Your Taxable Consulting Income
To determine your taxable income, you begin with your gross consulting revenue and subtract the costs of running your business. The IRS allows for the deduction of business expenses that are considered both “ordinary and necessary.” An ordinary expense is one that is common in your line of work, while a necessary expense is one that is helpful for your business.
If you work from home, you may be able to deduct a portion of your home’s expenses, such as mortgage interest, insurance, and utilities, through the home office deduction. This is calculated based on the percentage of your home used exclusively for business. The simplified option allows a standard deduction of $5 per square foot of office space, up to a maximum of 300 square feet.
Other frequent deductions include:
- Business travel costs, such as airfare, lodging, and 50% of the cost of meals
- Software subscriptions and professional development courses
- Business insurance premiums and marketing expenses
- Office supplies and equipment like computers and printers
- Fees paid for professional services from accountants or lawyers
Subtracting these total expenses from your gross income yields your net profit. This net profit figure is the amount subject to both income and self-employment taxes.
Reporting Income and Paying Taxes
Your clients who have paid you $600 or more during the year will send you Form 1099-NEC, which reports your nonemployee compensation. You will use the information from these forms, along with records of any other income, to complete Schedule C, Profit or Loss from Business. On Schedule C, you list your gross consulting income and detail all your deductible business expenses to calculate your net profit.
This net profit figure from Schedule C is then used to complete Schedule SE, Self-Employment Tax, to calculate the amount of Social Security and Medicare taxes you owe. The business profit and the self-employment tax are then transferred to your main tax return, Form 1040.
Because you do not have an employer withholding taxes from your pay, you are required to pay estimated taxes throughout the year. These payments cover both your income tax and self-employment tax liability and are made quarterly using Form 1040-ES. You can calculate the required payment using the worksheet included with the form or base it on your prior year’s tax liability to avoid underpayment penalties. Payments can be mailed with a voucher from the form or submitted electronically through IRS Direct Pay.
Responsibilities for Businesses Paying Consultants
Businesses that hire independent consultants must collect a completed Form W-9, Request for Taxpayer Identification Number and Certification, from the consultant before issuing payment. This form provides the consultant’s legal name, address, and Taxpayer Identification Number (TIN). The business must keep this form on file for at least four years.
The primary filing requirement for a business is to issue a Form 1099-NEC to any consultant to whom they paid $600 or more for services during a calendar year. This form details the total compensation paid and must be sent to the consultant and filed with the IRS by January 31 of the following year.
If a consultant does not provide a TIN, the business may be required to perform backup withholding, which involves withholding a flat 24% of the payments and remitting it to the IRS. Failing to collect a W-9 or filing an incorrect 1099-NEC can lead to penalties for the business. It is a best practice for businesses to request the W-9 as part of the onboarding process for any new contractor to ensure compliance.