Do I Have to Pay 1099-NEC to Both State and Federal?
Unravel the comprehensive tax responsibilities tied to your 1099-NEC income. Understand your full payment duties as a non-employee.
Form 1099-NEC reports nonemployee compensation for independent contractors or self-employed professionals. Understanding your tax obligations for this income is important for compliance. This article clarifies the federal and state tax responsibilities related to Form 1099-NEC income.
Understanding Your 1099-NEC Income
A Form 1099-NEC is issued by a business when it pays $600 or more to a nonemployee for services during the tax year. The income reported on a 1099-NEC is taxable income, distinguishing it from wages reported on a W-2 form.
The business issuing the form does not withhold federal or state income taxes from 1099-NEC payments. This places the full responsibility for tax payments directly on the recipient. Individuals receiving 1099-NEC forms must manage their tax liabilities throughout the year.
Federal Tax Responsibilities
Income reported on Form 1099-NEC is subject to federal income tax and self-employment tax. Federal income tax applies to this income like other earnings, added to your total gross income to determine your taxable income and final federal tax liability.
Self-employment tax covers Social Security and Medicare contributions, which are withheld from an employee’s paycheck. For self-employed individuals, this tax ensures contributions to these federal programs. The self-employment tax rate is 15.3%, comprising 12.4% for Social Security and 2.9% for Medicare.
The Social Security portion of the self-employment tax applies only to net earnings up to an annual wage base limit, which is $168,600 for 2024 and $176,100 for 2025. The Medicare portion, however, applies to all net earnings from self-employment without any income limit. Additionally, a 0.9% Additional Medicare Tax may apply to self-employment income exceeding certain thresholds, such as $200,000 for single filers or $250,000 for those married filing jointly.
To calculate self-employment tax, net earnings from self-employment are determined by multiplying your business profit by 92.35%. This amount is then subject to the 15.3% self-employment tax rate. Self-employed individuals can deduct one-half of their self-employment tax from their gross income when filing their federal income tax return. This deduction helps offset the burden of paying both the employer and employee portions of Social Security and Medicare taxes.
State Tax Responsibilities
In addition to federal obligations, income reported on a Form 1099-NEC carries state-level tax responsibilities. Most states with an individual income tax will also tax nonemployee compensation. State income tax applies to net earnings from self-employment, similar to the federal approach, but is calculated using state-specific tax rates and regulations.
State income taxation varies across the United States. While many states impose an income tax, nine states do not levy a state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. For individuals residing in these states, only federal income tax and self-employment tax apply to their 1099-NEC income.
For those living in states with an income tax, these state tax obligations are distinct from federal tax requirements. Some states may have unique reporting thresholds or specific provisions for self-employment income, which requires review of individual state tax laws. If federal taxes are due on your 1099-NEC income, state income taxes will also likely be due in states with an income tax.
Reporting and Payment Requirements
Reporting 1099-NEC income and fulfilling tax payment requirements involve specific forms and schedules. For federal tax purposes, income and expenses related to nonemployee compensation are reported on Schedule C, Profit or Loss from Business. This schedule details gross receipts and deductible business expenses, calculating your net profit or loss from self-employment.
The net profit or loss from Schedule C flows to your individual income tax return, Form 1040. Your self-employment tax liability is calculated on Schedule SE, Self-Employment Tax, also attached to your Form 1040. These forms ensure both your income tax and self-employment tax are reported to the Internal Revenue Service (IRS).
Since taxes are not withheld from 1099-NEC income, individuals must make estimated tax payments throughout the year to avoid underpayment penalties. These payments cover federal income tax, self-employment tax, and potentially state income tax, if applicable. Estimated federal taxes are paid using Form 1040-ES, Estimated Tax for Individuals.
Estimated tax payments are due quarterly: April 15, June 15, September 15, and January 15 of the following year. If any of these dates fall on a weekend or holiday, the deadline shifts to the next business day. State reporting requirements mirror federal practices, with individuals filing a state income tax return that incorporates their self-employment income and making estimated state tax payments.