1099 contractors can earn ~7% more by reporting their expenses.

1099 contractors can earn ~7% more by reporting their expenses.

tl;dr: If you earn considerable 1099 income in the US, report your business<br>expenses to the IRS.

Federal Income Tax

Tariffs funded most US government spending until 1913.

0%25%50%75%100%1850190019502000<br>CustomsExciseCorporateIndividualPayrollOther

The composition of US federal receipts, via<br>census.gov<br>and<br>whitehouse.gov.

After the 16th Amendment legalized federal income tax, Congress levied it via<br>the 1913 Revenue Act: a 1% income tax on high-earners (top ~2% of households).

0%25%50%75%100%1850190019502000<br>Owe no federal income taxOwe federal income tax

Share of US households owing no federal income tax, via<br>IRS SOI<br>and<br>Tax Policy Center.

To finance participation in World War I, the US expanded federal income taxation<br>via the 1917 War Revenue Act. The government required entities to report<br>income-like payments (i.e. interest, rent, dividends, wages) to the Bureau of<br>Internal Revenue (which later became the IRS). The form for reporting such<br>payments became known as Form 1099.

It goes like this:

Before paying a contractor, the payer collects a Form W-9 (personal<br>information) from the payee.

Each tax season, the payer submits Form 1099 (payment history) to the IRS and<br>the payee.

The payee reports their 1099 income on Form 1040 (individual income tax<br>return) and sends the IRS a calculated portion of that income.

0%5%10%15%20%1850190019502000<br>Median household tax rateAvg. household tax rate

Effective federal income and payroll tax rate, via<br>CBO, and<br>Tax Policy Center. The average line<br>aggregates the full payroll tax (employer and employee), but the median line<br>only counts the employee share -- the gap reflects payroll incidence, not<br>just progressive taxation.

To finance participation in World War II, the US expanded federal income<br>taxation via the 1943 Current Tax Payment Act. This act required employers to<br>withhold taxes from employee paychecks and send those funds directly to the<br>government. Employers record the wages/withholdings on Form W-2, which employees<br>report to the IRS via Form 1040 (individual income tax return).

0%10%20%30%1850190019502000

All taxes (federal, state & local) as a share of GDP, via<br>usgovernmentrevenue.com and<br>OECD.

Nowadays, income is reported in many different flavors:

Form<br>Reports<br>Issued by

W-2<br>Wages, salary, and tax withheld from a paycheck<br>Employer

1099-NEC<br>Nonemployee compensation (contractor pay)<br>Client / payer

1099-MISC<br>Rent, royalties, prizes, and other income<br>Payer

1099-K<br>Card and payment-app settlements<br>Stripe, PayPal…

1099-INT<br>Interest income<br>Bank

1099-DIV<br>Dividends and distributions<br>Brokerage

1099-B<br>Proceeds from broker and barter exchanges<br>Brokerage

1099-R<br>Retirement and pension distributions<br>Plan administrator

1099-G<br>Government payments (refunds, unemployment)<br>Government

1099-S<br>Real estate sale proceeds<br>Closing agent

1099-C<br>Cancelled debt<br>Lender

Meanwhile, self-employment is trending toward extinction. The modern wage<br>economy swallowed self-governed farmers, artisans, shopkeepers, etc.

0%25%50%75%100%18001850190019502000<br>Self-employed (1099-like)Wage & salary (W-2-like)

Independent vs wage-and-salary workers, via<br>Lebergott/Census/BLS.

Contractors secure freedom at the cost of US employment protections (e.g.<br>minimum wage, overtime pay, unemployment insurance, workers' compensation) and<br>guarantees (e.g. workplace healthcare mandates).

Business Expenses

The original 1913 Revenue Act permitted business expense deductions. The 1918<br>Revenue Act refined these allowances for individuals:

All the ordinary and necessary expenses paid or incurred during the taxable<br>year in carrying on any trade or business, including a reasonable allowance<br>for salaries or other compensation for personal services actually rendered;<br>and rentals or other payments required to be made as a condition to the<br>continued use or possession, for purposes of the trade or business, of<br>property to which the taxpayer has not taken or is not taking title or in<br>which he has no equity.

The IRS adheres to the Internal Revenue Code (IRC), which codifies legislation<br>(and court rulings) into enforceable statutes. The core of business expense<br>deductions is defined in IRC §162:

There shall be allowed as a deduction all the ordinary and necessary<br>expenses paid or incurred during the taxable year in carrying on any trade<br>or business.

Let's break that sentence down:

Ordinary : common and accepted in the trade or business, even if not<br>habitual for the particular taxpayer. A once-in-a-lifetime lawsuit defending<br>the business is ordinary; paying off someone else's bankrupt company's debts<br>to burnish your own reputation<br>is not.

Necessary : "appropriate and helpful" to the business, not strictly<br>indispensable.

Paid or incurred during the taxable year : distinguishes deductible<br>operating expenses from capital expenditures, which must be capitalized...