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How Can I File a 1099 and W-2 Together In The Same Year?
I Got A 1099 And A W-2 In The Same Year: Can I File Them Together?
Managed to turn your passion into a side hustle? Congratulations! As more and more Americans join the ranks of freelance workers, tax season can start to become a little more complicated. This is mainly because they find themselves dealing with a new tax form, a 1099, when they're only used to seeing a W-2 form from their employers.
Independent contractors should receive a 1099 form from every entity they do freelance work for, like a rideshare service they drive for or a company whose logo they design. This is different from a W-2 form that every employer sends to their employees. Normally, you would not do W-2 and 1099 work for the same entity, and you should receive a W-2 form from your employer and a 1099 from another entity.
The major difference between these forms is that a W-2 form shows money that's automatically withheld from an employee’s paycheck to pay for taxes, while a 1099 form does not, because the self-employed are considered to be both the employer and the employee. As such, they're responsible for paying their own taxes. So, if you find yourself with both a 1099 and a W-2 form in the same year, you will need to include them both in your 1040 form when filing your tax return, but you'll only need to worry about paying tax on the 1099 income.
Key takeaways:
- You need to pay tax on both 1099 and W-2 income if you receive them both in the same year.
- You will only need to pay all the self-employment tax based on the income shown on your 1099 form.
- Your W-2 form shows the half of your FICA you pay because your employer pays the other half.
Table of contents
How does a 1099 form affect my taxes?
A 1099 form reports the income a 1099 taxpayer has earned by doing non-employee work, meaning either independent contract work, a freelance gig, or self-employment work. The entity that issues the payment is responsible for reporting that payment to the IRS on a 1099 form, and for sending you a copy, but this need not be done if you didn't make more than $600.
The IRS has numerous types of 1099 forms, each serving a different purpose, but below are the three main forms you should be aware of.
Now if you’re asking yourself, "How will a 1099 affect my tax return?", you'll be required to pay federal income tax on that amount reported on any 1099 you receive.
Since there's no tax withheld from income reported on a 1099 form, you will be responsible for paying the entire 15.3% of the FICA (Federal Insurance Contributions Act) tax on your net income. 12.4% of this amount accounts for Social Security tax, while the remaining 2.9% accounts for Medicare tax.
This is not the case for employees who receive a W-2 form and don't have any 1099 income, as they will only have to pay half of the FICA tax, i.e. 7.65%, because the rest is covered by their employer. But there is some good news for freelancers and self-employed individuals: that second half of the FICA tax is deductible, so you can write it off from your taxable income.
All this may seem like receiving a 1099 form means you’ll end up paying more tax, but the opposite is actually true. Many people who work for themselves can pay less tax than an employee at a company, because they qualify to claim some of their business expenses as deductibles and lower their tax bill significantly!
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Is having a W-2 and 1099 in the same year useful?
Short answer: Yes! If you have self-employed income, you are expected to pay quarterly estimated taxes by the IRS. While this can seem daunting, having W-2 income, as well, can help you bring down your tax payment.
Let’s say you work full-time for an interior design company. You receive a W-2 form from them showing your annual income and how much tax was withheld from your paycheck depending on your tax bracket. You earn $42,000 a year, but you also work as a freelance design consultant and calculate that your quarterly tax payments will add up to $800 in total.
You could talk to your employer and use Form W-4 or an Employee’s Withholding Certificate to increase your tax withholdings from your W-2 income enough to cover your quarterly tax payments and not have to make separate payments for the quarterly estimated tax you owe.
One downside to this method is that your employer may overestimate how much to withhold, which may leave you with less in your paycheck than you need to cover your expenses. Your employer can also underestimate the withholding amount, leading to a fine from the IRS. If you're ever in doubt about using Form W-4, you can always pay your estimated taxes yourself every quarter using Form 1040-ES.
I have a W-2 and a 1099, can I get the Qualified Business Income deduction?
A QBID allows for small business owners and self-employed individuals to deduct 20% from their taxable income, provided their business is an S-corporation or sole proprietorship. These qualify as "pass-through entities," meaning the owner pays tax at an individual level rather than a corporate level.
Being a W-2 employee won't qualify you for a QBI deduction, but your 1099 income might. There are a lot of conditions that determine whether you will qualify for a QBI, and you can find them all here.
There are clearly some advantages to being both a W-2 employee and paying 1099 employee taxes, and it's easy to see how important it is to be aware of all of them when you're filing your taxes.
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