Why do you owe after going from W-2 to 1099?

Same work, same pay, different tax return

People who went from a W-2 job to 1099 work often ask why they owe so much when they file. The work may be the same and the pay may be the same, but the first tax return after the switch can show a balance due instead of a refund.

Two things changed, and neither one shows up until you file.

What your employer was doing for you

When you were on a W-2, your employer did two things behind the scenes:

• Withholding: income tax came out of every paycheck and went to the IRS for you.
• Half of Social Security and Medicare: you paid your share through your paycheck, and your employer paid a matching share on top of it.

On a 1099, neither of those happens. Nobody takes tax out of your pay, and you pay both halves of Social Security and Medicare yourself.

Self-employment tax adds up fast

Paying both halves yourself is called self-employment tax, and it comes on top of your income tax. Together, the two halves of Social Security and Medicare come to about 15% of most of what you earn.

Take a hypothetical example: on $80,000 of 1099 profit, that is around $11,000 of self-employment tax, before any income tax. So if you are on a 1099 and have not sent the IRS any tax payments yourself during the year, you will almost always owe when you file.

How to avoid the surprise next year

The fix is to pay the IRS yourself during the year with quarterly estimated tax payments. For each tax year, the first quarterly payment is due April 15. Making those payments as you earn the income can keep a big balance due from showing up on your next tax return.

How we handle it

At Sansone CPA & Financial, we coordinate your tax, investment, and retirement decisions so your estimated payments are planned around your actual income, not guessed at in April. That is part of our tax preparation and tax planning in Crystal Lake, IL.