If you are a W-2 employee with a side hustle, there’s a good chance that your taxes will be a little bit more complicated than usual– You’ll be receiving a Form W-2 wage statement from your regular employer and a Form 1099 NEC from your clients.
So, you’ll be required to report the income listed on both forms each year to the IRS on your personal income returns, but your income as an employee and independent contractor will be reported differently.
If you ever wondered whether you can file Form W2 and 1099 separately-- This article will answer that question and more.
The IRS Form W-2 is used for reporting annual wages earned by an employee and any withholdings from income such as Medicare and Social Security. Here, an employer is required to send a copy of the W-2 to the employee as well as the IRS reporting the employee’s annual wages.
The taxes of W2-employees are withheld when they are paid. However, when it comes to freelancers or self-employed individuals, they have to figure out their tax burden to both their state and federal government and are required to file form 1099.
The 1099 Form is an IRS tax form for individuals who earn income from other resources outside of the salary paid by an employer. So, if your employer or client sends you a self-employed 1099 form, it’s a sign that they see you as an independent contractor rather than an employee.
1099 is a tax form that reports income categorized as non-employee compensation. If you are self-employed and/or receive more than $600 in any given year, you must file your self-employed taxes.
Generally, all workers must pay a 15.3% tax under the Federal Insurance Contributions Act (FICA) on the income they receive as employees or independent contractors. That amount is inclusive of the 12.4% Social Security Tax and the 2.9% Medicare tax. However, W-2 employees only pay 7.65% of the FICA tax, as their employer covers the remaining 7.65%.
So, as a 1099 worker, you are responsible for paying the entire 15.3% FICA tax on the net income from your business. This refers to the “self-employment tax.” It may seem unfair, but Form 1099 workers are allowed to deduct one-half of the self-employment tax they pay.
Now, aside from shouldering the burden of paying Self-employment taxes, there are some tax benefits that are reserved only for the 1099 workers.
As an independent contractor, you are qualified to write off your business expenses.
In addition to claiming a deduction on half of your self-employment tax payment, you are also eligible to claim business deductions for job-related expenses that are not available to W-2 employees.
Some of the common business expenses that can be deducted by the 1099 workers include:
Since the tax system in the U.S. works on a pay-as-you-go basis, the IRS collects income taxes throughout the year in form of payroll taxes. Thus, when you file your tax return, you have already paid all of your taxes by the April deadline but that’s the case only with the W2 employees.
As an employee, your employer withholds money from your paycheck to pay your taxes. This money is taken out of your paycheck and remitted to the government without you having to do anything.
But, when it comes to self-employed workers, you must pay your taxes four times a year to the IRS using Form 1040-ES, Estimated Tax for Individuals. These taxes must total at least 90% of the tax owed for that year or 100% of the previous year’s tax.
Failing to pay quarterly taxes on time can lead to heavy penalties. The IRS can impose a penalty for delayed or inadequate payments, even if you’re due a refund when you file your tax return. Usually, people end up overpaying their taxes, which is why they receive a tax refund from the IRS. However, if you underpay, you will face a penalty when you file your return.
To report your income via Form W-2 you need to mention the income from Line 10 of the Form W-2 on your Form 1040, followed by any interest, dividends, retirement accounts, or Social Security benefits you have received on lines 2a through 5b.
Now, when it comes to reporting your Form 1099 income on your Form 1040, you need to report the income on different pages of Form 1040 depending on the type on Form 1099 you received. For example; if you received the 1099-NEC form for non-employee compensation you'll need to complete Schedule C and Profit or Loss From Business, and then finally transfer the net earnings to Form 1040. Similarly, any income on a 1099-INT must be reported on the first page of your tax return, Form 1040.
To calculate your Self-employment taxes, you need to file Form 1040 SE, if you have more than $400 in net earnings from self-employment. These net earnings will be subject to the 15.3% self-employment tax. Post that, you can subtract business expenses from your net revenue, and then multiply the difference by 0.9235 (or 92.35% of your net revenue).
Note: The 12.4% social security tax is only charged on the first $137,700 of income earned over a year, but the 2.9% medicare tax is charged on all of your income.
As a W2-employee, you get your taxes withheld from your salary. Whereas, if you are an independent contractor, you are considered self-employed and are required to file Form 1099 taxes. This implies that your earnings are subject to the Self Employment Tax.
However, the good news is that as a self-employed worker, you can lower your taxes by claiming tax deductions. It is a sure-shot way to lower your self-employment tax.
To calculate your 1099 taxes, you have to consider a few things such as your expected adjusted gross income, taxes, taxable income, deductions and credits for the year. Moreover, when it comes to paying your taxes, it is always better to rely on calculation rather than estimation, to accomplish this, you can use FlyFin.
FlyFin CPA Team
With a combined 150 years of experience, FlyFin's CPA tax team includes tax CPAs, IRS Enrolled Agents and other tax professionals, offering users the most comprehensive tax advice and preparation.