by Dave Horwedel, CEO of Torchlight Tax
Getting paid by 1099 could be costing you thousands of dollars in unnecessary taxes.
Technically, if you are an independent contractor and you are not operating through a corporation, then yes, you should be paid by 1099.
But that’s only the technical answer.
The bigger issue is how to save money on taxes.
if you are an employee being switched to 1099, your situation will be covered later in this article,
Now if you’re paid by 1099 as an individual, you’re subject to self-employment tax on top of income tax. The self employment tax is the employee’s share plus the employer’s share of Social Security and Medicare, which totals 15.3%.
So 15% of your profit. (up to the Social Security wage maximum of $176,100 for 2026) can go to the self employment tax. This is in addition to income tax!!
A 1099 contractor who is not a corporation pays this self-employment tax on his profits. This 1099 contractor files his business schedule C as an attachment to his personal 1040 tax return which shows his profit.
If you are an S corporation, you do not pay a tax on your profit. However, the IRS requires you pay yourself reasonable compensation on a W-2. This reasonable compensation will be subject to Social Security and Medicare tax.
Thus, many 1099 contractors could save ten thousand dollars or more by becoming an S corporation. A corporation or LLC can elect S corporation status by filing IRS Form 2553. In many cases, you can do a late election to request S corporation status for earlier years.
This can get complex. If you have any questions, you are welcome to contact us at 877-758-7797 or info@torchlighttax.com for a free consultation.
We also have 400 tax-saving and asset protection blog articles and videos on the Torchlight Tax website and YouTube channel for you to view. The more you know, the more taxes you are likely to save, and the safer your assets will be.
Now let’s talk about the employee side.
If you truly qualify to be a W-2 employee, being paid the 1099 rate as a W-2 employee can be more advantageous because your employer pays half of Social Security and Medicare taxes for employees.
That’s why switching from W-2 to 1099 at the same pay rate can be disadvantageous, as you take on the employer portion of payroll taxes personally.
Contact Torchlight Tax for a free consultation at 877-758-7797 or fill out a form here.
