tl;dr: If you earn considerable 1099 income in the US, report your business expenses to the IRS.
## Federal Income Tax
Tariffs funded most US government spending until 1913.
CustomsExciseCorporateIndividualPayrollOther
The composition of US federal receipts, via census.gov and whitehouse.gov.
After the 16th Amendment legalized federal income tax, Congress levied it via the 1913 Revenue Act: a 1% income tax on high-earners (top ~2% of households).
Owe no federal income taxOwe federal income tax
Share of US households owing no federal income tax, via IRS SOI and Tax Policy Center.
To finance participation in World War I, the US expanded federal income taxation via the 1917 War Revenue Act. The government required entities to report income-like payments (i.e. interest, rent, dividends, wages) to the Bureau of Internal Revenue (which later became the IRS). The form for reporting such payments became known as Form 1099.
It goes like this:
- Before paying a contractor, the payer collects a Form W-9 (personal information) from the payee.
- Each tax season, the payer submits Form 1099 (payment history) to the IRS and the payee.
- The payee reports their 1099 income on Form 1040 (individual income tax return) and sends the IRS a calculated portion of that income.
Median household tax rateAvg. household tax rate
Effective federal income and payroll tax rate, via CBO, and Tax Policy Center. The average line aggregates the full payroll tax (employer and employee), but the median line only counts the employee share -- the gap reflects payroll incidence, not just progressive taxation.
To finance participation in World War II, the US expanded federal income taxation via the 1943 Current Tax Payment Act. This act required employers to withhold taxes from employee paychecks and send those funds directly to the government. Employers record the wages/withholdings on Form W-2, which employees 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 usgovernmentrevenue.com and OECD.
Nowadays, income is reported in many different flavors:
Meanwhile, self-employment is trending toward extinction. The modern wage economy swallowed self-governed farmers, artisans, shopkeepers, etc.
Self-employed (1099-like)Wage & salary (W-2-like)
Independent vs wage-and-salary workers, via Lebergott/Census/BLS.
Contractors secure freedom at the cost of US employment protections (e.g. minimum wage, overtime pay, unemployment insurance, workers' compensation) and guarantees (e.g. workplace healthcare mandates).
## Business Expenses
The original 1913 Revenue Act permitted business expense deductions. The 1918 Revenue Act refined these allowances for individuals:
All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.
> # [1099 contractors can earn ~7% more by reporting their expenses.](https://taylor.town/expenses-000)