The Truth About 1099 Income

If you earn 1099 income, the first shock usually comes at tax season. You realize no one had been quietly taking taxes out of your paycheck the way they do for W-2 workers. That responsibility is now on you. And since you pay both the employer and employee side of Social Security and Medicare, the bill can feel like a punch in the stomach.

The good news is that self employed people also have access to some of the most powerful deductions in the tax code. The trick is knowing which ones matter, how to use them, and when to plan ahead.

Claim Every Legitimate Business Expense

This sounds obvious, but it is the single biggest way to lower your tax bill. Anything ordinary and necessary for your business counts. That could mean software, gear, travel, office furniture, marketing costs, or even part of your rent if you qualify for the home office deduction.

Home office rules are straightforward. Your space has to be used regularly and exclusively for work. You can either take the simplified method, which is $6 in 2025 up to 300 square feet, or you can calculate actual expenses. That means figuring out the percentage of your home used for business and applying it to rent, utilities, and insurance.

Whichever route you take, track it. A clear record turns what looks like a personal expense into a legitimate deduction.

Remember the Self Employment Tax Deduction

Every freelancer pays 15.3% self employment tax once they earn more than $400. That covers both halves of Social Security and Medicare. It sucks. But you also get to deduct half of that tax from your income when you calculate adjusted gross income.

So if you pay $6,000 in self employment tax, you can write off $3,000. It does not make the whole thing disappear, but it helps. Most people miss it because it happens automatically on Schedule SE. Knowing it is there means you can factor it into your planning instead of being surprised.

Take the QBI Deduction if you Qualify

The Qualified Business Income (QBI) deduction is one of the best breaks in the code. If you are a sole proprietor, LLC, or S corp, you may be able to deduct up to 20% of your business income.

Here is how it works. If you make $100,000 in qualified business income, you might be able to knock $20,000 off your taxable income. That does not reduce self employment tax, but it does lower income tax.

There are income thresholds. For 2025, single filers under $197,300 and joint filers under $394,600 get the full deduction. Above that, it phases out, especially for service businesses. But for most freelancers, it is money left on the table if you do not claim it.

And the great thing is that it is sticking around! The 2025 One Big Beautiful Bill Act made it a permanent deduction in the tax code. Read more here on other big tax changes that were ushered in with the OBBA: The One Big Beautiful Bill

Deduct Health Insurance Premiums

If you pay for your own health insurance, you can usually deduct the full premium for yourself, your spouse, and your dependents. This includes medical, dental, vision, and even some long term care policies. The catch is that you cannot claim deduction for months when you or your spouse were eligible for (W-2) employer coverage.

For many freelancers, this is one of the few ways to make expensive health insurance feel a little less brutal.

Save for Retirement and Save on Taxes

Self employed retirement accounts are double wins. They reduce your taxable income today and give you tax deferred growth for the future.

• Solo 401(k): Up to $70,000 in 2025, or $81,250 if you are over 60.
• SEP IRA: Up to 25% of compensation or $70,000, whichever is less.
• Simple IRA: Up to $16,000 in 2025.

These numbers are far higher than the limits for traditional or Roth IRAs. If you are making solid money, this is one of the fastest ways to cut your tax bill.

Think about S Corp Status Once You Grow

At a certain point, usually when profits hit around $75,000 or more, it may make sense to elect S corporation status. The basic idea is that you split your income between salary and distributions. You pay self employment tax only on the salary portion.

For example, if you earn $150,000, you might pay yourself a $75,000 salary and take $75,000 in distributions. That can save more than $11,000 in self employment tax. The tradeoff is more paperwork, payroll compliance, and accounting costs. For smaller businesses, it may not be worth it. For bigger ones, it can be huge.

Do not Skip Quarterly Taxes

The IRS expects you to pay as you earn. That means quarterly estimated taxes are required if you will owe more than $1,000 for the year. The due dates are April 15, June 15, September 15, and January 15 of the following year.

Skip them and you may face penalties, even if you pay everything by April. Setting aside around 25% to 30% of your income in a separate bank account makes quarterly payments far less stressful.

Beluga can actually be a huge help with this! We will put your quarterlies on autopilot, and withhold only the correct amount. This means no more guess work for you, and you will have the max amount of money available without worrying about coming up short on the next tax bill.

Keep Records like Your Future Self Depends on it

Receipts, bank statements, mileage logs, invoices, and notes about business purpose all matter. The IRS does not require paper copies anymore. Photos, PDFs, and spreadsheets are fine. The key is having proof if they ask.

If you ever get audited, a clean set of records turns it from a nightmare into a formality.

Bottom Line

1099 income comes with higher taxes, but also better tools to cut them down. Deduct everything that qualifies. Take the self employment and QBI deductions. Do not forget health insurance and retirement savings. Consider S corp status when the numbers justify it. Pay quarterly. Keep records.

None of this makes taxes fun, but it does make them manageable. And the more you plan ahead, the more of your money stays with you instead of going to the IRS.

Keep on Creating!

— The Beluga Team