TradeDay Tax Status: Are You an Employee or Contractor?

You made $15,000 trading your TradeDay funded account this year. Come tax season, you discover you owe not just income tax on that $15,000, but also $2,295 in self-employment tax that you didn't know about. Plus penalties for not making quarterly estimated payments throughout the year.

This scenario happens to hundreds of funded traders every April. They think prop firm payouts work like investment gains (capital gains tax) or assume TradeDay withholds taxes like a regular employer. Neither is true. Understanding your tax status isn't optional — the IRS doesn't care that you didn't know. This article explains exactly what your classification means, what forms you'll receive, what you owe, and how to avoid expensive surprises.

Quick heads-up: This article is based on my real experience with TradeDay and the info available when I published/updated this. Things change in prop trading — rules, payouts, promos, all of it.

For the absolute latest, check TradeDay´s website or their faq page.

You're An Independent Contractor, Not An Employee

TradeDay's official position (from their help documentation):

"As a funded trader at TradeDay you are not considered an employee of TradeDay, you are considered as an Independent Contractor. Earnings should be reported as regular income."

What this means practically:

• No W-2 form (you're not an employee)
• No taxes withheld from your payouts
• No employer-provided benefits or retirement contributions
• No unemployment eligibility if you lose funding
• You receive 1099-NEC form instead (if you withdraw over $600/year as a US citizen)
• You're responsible for calculating and paying your own taxes

Think of yourself as running a small trading business. TradeDay is your client, not your employer. They pay you for profitable trading services. You handle all tax obligations yourself, just like a freelance designer or Uber driver would.

This classification applies the moment you start receiving payouts from funded accounts. During evaluation phase, you're not receiving income — you're paying a monthly subscription. No tax implications exist until you pass and start withdrawing profits.

The 1099-NEC Form (And What It Actually Means)

Who receives it:

• US citizens who made withdrawals totaling over $600 in the calendar year
• Issued by Riseworks (TradeDay's payment processor) in late January/early February

Who doesn't receive it:

• Traders who withdrew under $600 (but you still owe taxes on that income)
• Non-US citizens (TradeDay doesn't issue international tax forms)

What's on the form:

• Box 1: Total non-employee compensation (your gross payout amount)
• Your Social Security Number or Tax ID
• Riseworks as the payer

Critical misunderstanding:

The 1099-NEC shows your gross payouts, but you're not taxed on trading profits you haven't withdrawn. If your funded account balance is $58,000 ($8,000 profit) but you only withdrew $3,000, your 1099-NEC shows $3,000, not $8,000. You're only taxed on money you actually received.

This is different from trading your personal account, where unrealized gains might be taxable under mark-to-market accounting. With prop firm payouts, only withdrawn amounts count as income for that tax year.

How Prop Firm Income Is Taxed (Not Capital Gains)

The key distinction:

Prop firm payouts are taxed as ordinary business income, not capital gains. This matters significantly for your tax rate.

Capital gains (trading your own money):

• Long-term (held >1 year): 0%, 15%, or 20% depending on income
• Short-term (held <1 year): Regular income tax rates

Prop firm payouts (TradeDay funded account):

• Taxed at your ordinary income tax rate (10%-37% federal)
• Plus 15.3% self-employment tax on the first $168,600 (2024 threshold)
• No capital gains treatment available

Example comparison:

Scenario: You make $50,000 trading

If trading your personal account with mostly long-term gains:

• Federal tax: $7,500 (15% capital gains rate for most taxpayers)
• Total: $7,500

If trading TradeDay funded account:

• Federal income tax: $11,000 (22% bracket for single filer)
• Self-employment tax: $7,065 (15.3% - though half is deductible)
• Total: ~$15,500 (after deducting half of SE tax)

This is why some traders prefer personal accounts once they've built capital. The tax treatment on prop firm income is significantly worse than capital gains.

Self-Employment Tax: The Part Nobody Warns You About

Self-employment (SE) tax is 15.3% on your net earnings, covering Social Security (12.4%) and Medicare (2.9%).

How it's calculated:

Net profit from Schedule C × 92.35% × 15.3% = SE tax owed

On $30,000 net profit: $30,000 × 0.9235 × 0.153 = $4,239 SE tax

Half of your SE tax is deductible on Form 1040, which reduces your income tax somewhat. SE tax only applies up to $168,600 (2024) for the Social Security portion. Most funded traders making $20K-$80K/year pay SE tax on all their prop firm income.

Schedule C: Your Tax Filing Form

What is Schedule C?

"Profit or Loss From Business" — the form where you report self-employment income and expenses.

What you report:

Part I - Income

• Line 1: Gross receipts (your total payouts from 1099-NEC)

Part II - Expenses

• Line 8: Advertising (if you promote your trading somehow)
• Line 10: Commissions/fees (platform costs, data fees)
• Line 18: Office expenses (monitors, keyboard, mouse)
• Line 25: Utilities (portion of internet used for trading)
• Line 27a: Other expenses (evaluation fees, reset fees, education)
• Line 30: Home office deduction (if you qualify)

Your net profit from Schedule C flows to your Form 1040 and also determines your SE tax on Schedule SE.

Quarterly Estimated Tax Payments (Yes, You Need To Do This)

If you expect to owe $1,000+ in taxes, you must make quarterly estimated payments.

Due dates: April 15, June 15, September 15, January 15

How to calculate:

Use Form 1040-ES. Estimate annual net profit, calculate income tax + SE tax, divide by 4. Example: $40,000 net profit = ~$14,452 annual tax = $3,613 quarterly.

Penalties for not paying: IRS charges 5-8% annually on amounts you should have paid. Owe $15,000 at tax time but paid $0 quarterly? Expect $600-$1,200 penalty.

Safe harbor: Pay 100% of last year's total tax (110% if AGI over $150K), or 90% of this year's tax — whichever is smaller.

Business Expense Deductions You Can Actually Take

Fully deductible:

1. TradeDay subscription fees during evaluation ($105-$375/month)
2. Reset fees ($99) and activation fees ($139, often waived)
3. Trading platform subscriptions and data feed costs
4. Trading education directly related to your trading
5. Software/tools (charting, scanners, trade journals)
6. Internet and phone service (percentage used for trading)
7. Computer equipment (hardware under $2,500 can be expensed immediately)

Partially deductible:

8. Home office (if you have dedicated space used exclusively for trading)

Not deductible: Meals, commute costs, general "improvement" expenses not directly trading-related.

Failed evaluations: Yes, fees for failed evaluations are deductible as ordinary business expenses. Three months at $105/month before passing = $315 deductible.

The test: Is it "ordinary and necessary" for your trading business? If yes, deduct it.

Record Keeping Requirements

Track every payout (date, amount, which account), all business expenses with receipts, subscription billing statements, platform invoices, and screenshots of 1099-NEC.

Keep records for 3-4 years minimum. Use QuickBooks Self-Employed, Wave (free), or a simple spreadsheet tracking monthly payouts and expenses.

The nightmare: getting audited without documentation. The IRS disallows deductions you can't prove.

Non-US Traders: You Still Owe Taxes

TradeDay's position:

"Non-US citizens will not receive this form (1099-NEC) as it is only used in filing US taxes. We cannot provide any documents for reporting taxes to foreign governments."

What this means:

You're on your own. TradeDay won't help you with tax compliance in your country. You must:

1. Track all payouts yourself
2. Determine how your country taxes prop firm income
3. Report it accurately according to local tax laws
4. Pay any required taxes

Country-specific complications:

Some countries (like Germany) have strict regulations on trading with "other people's money" that may require financial licenses. TradeDay's simulated account structure creates a loophole in some jurisdictions, but you need to verify this with a local tax professional.

W-8 BEN form:

Non-US traders typically submit this to Riseworks to claim treaty benefits and reduce/eliminate US withholding tax. Make sure this is completed correctly when you onboard for payouts.

Common Tax Mistakes Funded Traders Make

Mistake 1: Not reporting income without a 1099-NEC. If you withdrew $400, you still owe taxes — the $600 threshold is for IRS reporting requirement, not tax obligation.

Mistake 2: Thinking evaluation fees aren't deductible. Four months at $105/month before passing = $420 business expense. Deduct it.

Mistake 3: Not setting aside money for taxes. Set aside 30-35% of every payout immediately.

Mistake 4: Claiming personal expenses as business expenses. Your Netflix isn't deductible because you watch trading videos occasionally.

Mistake 5: Mixing personal and business finances. Open a separate checking account for trading income and expenses.

The Bottom Line: Treat It Like A Business, Not A Hobby

The IRS classifies you as self-employed running a trading business. This comes with obligations (quarterly taxes, SE tax, Schedule C filing) but also benefits (business expense deductions, home office deduction, retirement contributions).

Most traders should budget 25-35% of gross payouts for total tax obligations (federal income + SE + state if applicable). If you withdraw $30,000 from TradeDay, expect to owe $7,500-$10,500 depending on your bracket.

Action items before your first payout:

1. Open a separate bank account for trading income
2. Start a spreadsheet tracking payouts and expenses
3. Calculate estimated quarterly tax payments
4. Set up automatic transfers: 30% of each payout → tax savings account
5. Find a CPA who understands prop trading (not all do)

You're not an employee. You're an independent contractor running a trading business. Once you accept this reality and plan accordingly, tax season becomes predictable instead of painful.

Your Next Steps

‍👉 Start Trading at TradeDay Today

‍👉 Read My Full TradeDay Review

‍👉 Check out TradeDay´s Payout Rules

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