Independent contractor who expected a refund
A first full year on his own: $87,000 of 1099 income, no W-2, and no estimated payments. He expects a big refund and instead owes. Schedule C, self-employment tax, and the QBI deduction explain why.
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Taxpayer facts
Who this is and what their year looked like.
Daniel is single, with no dependents, and works as a self-employed IT contractor in Houston, Texas. 2025 was his first full year on his own after leaving a salaried job, and every client paid him on a 1099-NEC with nothing withheld.
He keeps simple books on a cash basis and pays for his own equipment, software, and insurance. He made no estimated tax payments during the year, because he assumed he would get a refund the way he always did as an employee.
Source documents
The 3 documents you will prepare the return from: 1099-NEC (Nonemployee Compensation), 1099-NEC (Nonemployee Compensation), Taxpayer's business records — Whitfield Tech Services.
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Objectives
What a correct return should capture.
- Report ALL business income on Schedule C: both 1099-NEC amounts.
- Deduct the ordinary and necessary business expenses, and compute the vehicle deduction with the standard mileage rate (the business miles at 70 cents a mile).
- Arrive at the Schedule C net profit. Note that this is different from the gross receipts he 'made': gross receipts minus expenses is what gets taxed.
- Compute self-employment tax on Schedule SE: 92.35% of net profit, then the 12.4% and 2.9% layers. This is the number most first-year contractors do not expect.
- Take the above-the-line adjustment for one-half of the SE tax.
- Compute the qualified business income (QBI) deduction on Form 8995, and watch the 20%-of-taxable-income limit.
- Apply the standard deduction, then add income tax and SE tax to get total tax.
- See the punch line: with nothing withheld and no estimates paid, there is nothing to refund, and the whole total tax is still owed at filing. The real levers are legitimate deductions, the QBI deduction, and paying quarterly estimated taxes.
- Compute the Form 2210 underpayment penalty. The required annual payment is the smaller of 90% of the 2025 tax or 100% of his 2024 tax, due in four equal installments, and none was paid. Figure the interest at 7% on each missed installment and add the penalty to the balance due.
- Note that Texas has no state income tax, so there is no state return here.
Check your work
The answer key and the complete return, the way a real client receives it: the 1040 and its schedules, the workpapers behind every number, and the signature forms.
Stuck? Work through it with Yehuda
A one-on-one, 30-minute tutoring session on this return with Yehuda Tenenbaum, EA. Bring the spot where you got stuck and we will work through it together: how the forms connect, why a figure lands where it does, and how to check your work. $250. This is education on the practice return, not advice on your own taxes.