The IRS treats nurses who are employees or independent contractors the same way it treats any other employee or contract worker for tax reporting purposes.
A W-2 nurse’s employer will automatically withhold federal income and FICA taxes from paychecks. Nurses who are independent contractors or provide freelance care and receive 1099 forms are responsible for paying taxes to the IRS themselves, including quarterly estimated taxes and self-employment tax for Social Security and Medicare.
What Deductions Can 1099 Nurses Claim, and How Do They Differ for W-2 Nurses?
1099 nurses can claim business expenses related to nursing, such as continuing education, professional dues, supplies, and travel. A 1099 nurse can also deduct health insurance premiums for themselves and their family. In addition, 1099 nurses can make retirement contributions to help reduce taxable income.
W-2 nurses can generally only claim standard or itemized deductions, like interest paid on a mortgage or charitable contributions and donations.
Tax credits that are available to both 1099 and W-2 nurses include:
- Earned income tax credit (EITC)
- Child and dependent care credit
- Lifetime learning credit (LLC)
- Retirement savings contributions credit
How Can W-2 and 1099 Nurses Contribute to Retirement to Reduce Taxable Income?
W-2 and 1099 nurses can contribute to retirement accounts like IRAs or 401(k)s to lower total income the IRS taxes. W-2 nurses often have employer-sponsored retirement plans with matching contributions.
1099 nurses can contribute to self-employed retirement plans such as SEP IRAs or solo 401(k)s.
Although Simplified Employee Pension (SEP) plans apply to any size business, they can be more beneficial to self-employed workers and small companies.
1099 nurses can put up to 25% of net income into a SEP IRA account for retirement.
The IRS states the following about SEP IRAs:
- No filing requirement is necessary for contract nurses for SEP IRAs
- Can be established with Form 5305-SEP PDF, individually created plan document, or SEP prototype
- 1099 nurses always retain ownership of money vested in a SEP IRA
How Are Estimated Tax Payment Requirements for 1099 Nurses Different From W-2 Nurses?
Federal and state taxes are automatically withheld from paychecks for W-2 nurses. Estimated tax is a quarterly payment that 1099 nurses and other self-employed individuals must send to the IRS to pay tax on income that isn’t subject to automatic withholding.
Nurses must pay estimated taxes if they are freelance/independent contractors and:
- They expect to owe over $1,000 in federal income tax after subtracting refundable and withholding credits
- They expect their refundable and withholding credits will be less than 90% of the tax for their upcoming tax return or 100 percent of the tax indicated on their previous tax return
1099 nurses must make quarterly estimated tax payments to avoid penalties if these criteria apply to their income. Quarterly taxes are paid every January, April, June, and September.
The IRS lists the exact due dates for estimated tax payments at irs.gov/faqs/estimated-tax/individuals/individuals-2.
What are the Potential Penalties for Not Properly Managing Taxes as a 1099 Nurse?
Underpayment penalties are imposed if a 1099 nurse doesn’t pay enough estimated taxes during the year. The amount is equal to the IRS current interest rate for underpayments. As of now, the IRS adds 8% interest to unpaid taxes.
1099 nurses who fail to pay their taxes by the due date will also have a 0.5% penalty tacked on to unpaid taxes for part of a month or for each month those taxes remain unpaid.
The maximum late payment penalty is 25%. Keep in mind that this is in addition to interest.
If a 1099 nurse doesn’t file taxes at all, a failure to file penalty is 5% of any unpaid taxes for part of a month or each month the return is late. The maximum failure to file penalty is also 25%.
What Steps Can Both W-2 and 1099 Nurses Take With the IRS When Unable to Pay Their Tax Debt in Full?
The IRS offers several ways for W-2 and 1099 nurses to minimize interest charges and prevent penalties, federal tax liens, and wage and bank levies when they need relief to help pay off tax debt.
Short-term and long-term payment plans are available so nurses can have additional time to resolve unpaid back taxes and do so with more affordable monthly payments.
An Offer in Compromise (OIC) allows W-2 and 1099 nurses with a financial hardship to settle the total taxes they owe the IRS for a lower settlement amount.
The IRS considers income, expenses, and overall financial situation to determine eligibility for an OIC and the exact offer amount they’ll accept.
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