A lot of work in the Permian Basin is contract work. If you receive a 1099 instead of a W-2, your tax situation is different in three important ways.
Nothing was withheld
An employer withholds income tax from a W-2 paycheck. A company paying you on a 1099 does not withhold anything. That money looked like yours all year, and part of it was never yours.
This is the number one reason first-year contractors owe money they were not expecting.
You pay self-employment tax
On a W-2, the employer pays half of Social Security and Medicare. On a 1099, you pay both halves. That is a real additional amount on top of income tax and it catches people out.
You can deduct business expenses
This is the part that works in your favor, and only if you kept records.
- Mileage driven for work, with a log.
- Tools and equipment.
- Supplies and materials.
- Work-related phone use.
- A home office, if it qualifies.
- Licenses, permits and required training.
Keep the records during the year, not at tax time. Reconstructing a year of mileage in April from memory is not a record, and it is not something we can work from.
Quarterly estimated payments
Because nothing is withheld, the IRS generally expects payments through the year rather than one payment at filing. Missing them can result in a penalty even if you pay in full later.
If this is your first year on a 1099, that is the conversation to have now rather than next April.
Come talk it through
We work with contractors across Midland and Odessa in English and Spanish. Call (432) 257-7547.
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