Laying Out the 1099 vs W2 Tax Filing
If you are working both as a W2 salary employee and a freelancer, you will need to file Tax Form 1099 along with your regular W2 tax return. Because the IRS treats every 1099 payment as taxable income, you are required to report your 1099 payments on your tax return. Whether or not you received all your 1099 Tax forms, taxpayers are required to report income when filing taxes. If the taxpayer did not receive 1099 Tax Form which is required for the income earned – even if the business did not file 1099 Tax Forms – the taxpayer might be able to report it as non-business income. Let’s get into 1099 vs W2 right away.
W2 vs 1099: The Difference Between W2 and 1099
As someone who earns income from both regular employment and independent contracting, you may be wondering what the difference is between 1099 vs W-2. Most people are already familiar with W-2s, which is the form that employers use to report annual wages earned by employees, as well as any withholdings from income.
Employers are required to send a copy of the employee’s W-2 to both the IRS And the employee. The employer is also obligated to withhold taxes from the employee’s wage payments. However, things work a bit differently for those who receive income as independent contractors.
If you earn $600 or more in a year from a single client as an independent contractor, you will receive a 1099 form. This can either be a 1099-NEC (if you were paid directly) or a 1099-K (if you were paid through a credit card or other payment methods).
So at tax time, those who earn money in both ways will end up with two different types of forms.
1099 vs W2: How Do you Know Which One is Which?
Do you know whether you are classified as a W-2 employee or a 1099 employee? Here are some things to remember as you work to determine your employment status and to be aware of your tax liability.
If your employer controls when you work, what tasks you perform, and what equipment you use, you are likely a W-2 employee. On the other hand, if you can set your own schedule and work independently, you may be classified as a 1099 employee.
1099 vs W2: What to Expect When Filing Tax for Each One?
W-2 workers and 1099 workers face different tax liabilities. The key distinction is that W-2 workers have taxes withheld from their paychecks, while 1099 workers do not. In addition, W-2 workers pay less in FICA taxes. FICA taxes refer to the Federal Insurance Contributions Act.
Taxes for W-2 vs. 1099 workers differ mainly because the former have taxes automatically withheld from their paychecks and pay less in FICA taxes. FICA taxes, amounting to 15.3% of taxable income, include the 12.4% Social Security tax and the 2.9% Medicare tax and apply to all earners regardless of employment status.
If you’re a W-2 employee, your employer covers half of the FICA tax, which is 7.65%. But if you’re a 1099 contractor, you are responsible for the entire 15.3% FICA tax on your net income. This is often referred by the IRS as self-employment tax.
If you earn both W-2 and 1099 income, then you’ll only pay the self-employment tax on the money earned through self-employment.
Take a Deeper Dive into W2 vs 1099 MISC vs 1099 NEC
If the 1099 form is not received, taxpayers are still liable to pay taxes on any income earned throughout the tax year. Businesses are required to send out a 1099 form to a taxpayer (other than a business) that received at least $600 or more in non-employment income during the tax year. The 1099 form is used to report non-employment income to the Internal Revenue Service (IRS). For example, Form 1099 is used to report certain types of non-employment income to the IRS, such as dividends on a stock or payments received by an independent contractor.
The 1099-MISC tax form is used by businesses to report payments made to independent contractors in the last year. When a taxpayer files both a Form W-2 and a Form 1099-MISC for the same worker in a single year, and payments reported on each return were made over a single period of time, the taxpayer can assert that the employee performed two separate, different services – one as an employee, and one as an independent contractor. When a taxpayer files both a Form W-2 and a Form 1099-MISC for a worker for the same year, and payments reported on the Form 1099-MISC can be explicitly identified as Supplemental Compensation (such as taxable fringe benefits), examining whether Supplemental Compensation is subject to the employment tax is a Wage Earnings Issue. When the taxpayer does not treat a worker as a dependent, the examination of whether compensation is subject to employment taxes is considered to be a question of employee classification.
The employer also would deduct taxes from wage payments received by the worker. An office employee will receive a tax 1099 reporting the painting earnings on top of a W-2 reporting his or her regular salary. If you work at more than one company, you will receive a 1099 form for each. If you own your business or are working as a freelancer, you are more than likely to get a 1099-NEC form for every project that you do.
Self-employed taxpayers who do freelance work or who have side gigs that generate income of over $600 can get a 1099-NEC form. Although self-employed taxpayers earning less than $600 may not receive a 1099-NEC, they must report all income on their taxes. Taxes are not subtracted from your paychecks, except under certain circumstances, so the 1099-NEC is necessary to file your taxes accurately. That is unless a particular Form 1099 includes a return of federal income taxes that were withheld from a payment of related income on behalf of the payer.
This means the Internal Revenue Service (IRS) shares some information on income record forms, automatically satisfying taxpayers reporting requirements with Treasury. A taxpayer, recipient, or payee receives a 1099 form, either on paper or, occasionally, as an email copy, from the issuer or payee, on or before Jan. 31 of the next tax year for which the income was paid. Your 1099 form is a kind of informational return; you receive a 1099 form in the mail if you receive specific types of income or payments during the year (other than wages, salaries, or tips).
At the end of the year, you will get two types of tax documents: your employer’s Form W-2 and your employer’s Form 1099-MISC, which is from whatever companies you are freelancing or contracting with. These next two types of 1099 forms ask you to report income either on a Schedule C, which is generally taxable as self-employment or a Schedule E. Outside of Form 1099-MISC, you might have to report estimated taxes quarterly if you are going to be paying more than $1,000 in taxes during the fiscal year.
However, in some cases, if you are a 1099 employee, you will be responsible under the federal insurance contribution law. For individuals who make both W-2 and 1099 income, you will only pay self-employment taxes on money earned via self-employment, while FICA taxes on regular wages stay the same.