What Happens If I Have Form 1099 and a Form W-2 Income In The Same Year?
If you are working for a business as an employee while also working side jobs as a freelancer, your 1099 independent contractor taxes will be a bit more complicated. You should be getting both a Form W-2 wage statement from your employer and a Form 1099 reporting non-employee payments made by your clients. You are required to report the income listed on both forms each year to the Internal Revenue Service on your personal income returns, but your income as an employee and independent contractor will be reported differently.
It is uncommon, but there are times when an individual will receive a Form W-2 and Form 1099 from the same business. This usually happens when a business has paid a regular employee to work on a side project unrelated to his or her regular work. For example, if a business pays a customer service associate who is a full-time employee extra to come in and repaint the office over a weekend, that additional payment will likely be treated as a non-employee service and the employee will receive a Form W-1099 reporting the painting income in addition to the Form W-2 reporting his or her wages.
Who Gets the Forms 1099 and W-2?
Employers use the IRS Form W-2 to report the annual wages earned by an employee and any withholdings from income. An employer must send a copy of the W-2 to the employee and the IRS reporting the employee’s annual wages. The employer will withhold taxes from payments made to the employee, but not the independent contractor.
Organizations must report business-related payments of more than $600 to non-employees like independent contractors or freelancers on either a Form 1099-NEC or a Form 1099-MISC. The Form 1099-NEC is new for 2020 and is used to report payments to non-employees for services. The Form 1099-MISC was used to report non-employment compensation until 2020, but it is now used to report most other types of payments to a non-employee. Since employers rarely withhold from payments to independent contractors, there are rarely any deductions reported on Forms 1099.
Are Form 1099 and Form W-2 Workers Taxed Differently?
All workers must pay a 15.3% tax under the Federal Insurance Contributions Act (FICA) on payments they receive as employees or independent contractors. That amount includes the 12.4% Social Security Tax and the 2.9% Medicare tax. However, Form W-2 employees only pay 7.65% of the FICA tax, with the employer covering the remaining 7.65%.
If you are a Form 1099 worker you will be responsible for the entire 15.3% FICA tax on the net income from your business, which is usually referred to as the “self-employment tax.” While this may seem unfair, the rationale is that you are serving as both the employee and employer and should pay both halves of the tax. Form 1099 workers are allowed to deduct one-half of the self-employment tax they pay.
If you are self-employed and plan on claiming business expenses, you should know that you can claim the Form 1040 “standard deduction” for taxpayers who do not itemize their deductions on your personal income tax filing while still claiming business deductions on your Form 1040 Schedule C, Profit or Loss from Business (Sole Proprietorship). The 2020 standard deduction for individuals is $12,400 and $24,800 for married taxpayers filing jointly.
Additional Deductions Available to Form 1099 Workers
If you are self-employed and receive Form 1099 income, in addition to claiming a deduction of half of your self-employment tax payment, you are also entitled to claim additional deductions for job-related expenses that are not available to employees. The largest of which is the 20% qualified business income (QBI) deduction that can be claimed for income derived from most trades or businesses. The QBI deduction is intended to help small businesses and the size of the deduction is subject to limitations when a taxpayer’s income reaches $157,500 ($315,000 for joint filers). Other business expenses that may be deducted by the self-employed include:
- Home office expenses
- Phone and internet bills
- Health insurance premiums
- Business insurance premiums
- Business Travel lasting longer than one day
- Meals while traveling for business
- Vehicle expenses based on mileage driven or actual expenses
- Interest on business loans
- Subscriptions to industry publications
- Business-related educational expenses
- Rent paid to others
- Startup costs
One of the most popular deductions the self-employed claim is the home office deduction. While it used to be said that claiming the home office deduction raised a red flag with the IRS and invited an audit, most tax professionals no longer believe that to be true in an age when more people are working from home. However, to be safe, you should make sure your home office is reserved exclusively for business. Here's a complete list of 1099 deductions.
Form 1099 Workers Must Pay Quarterly Taxes
Form W-2 employees can use their income tax withholdings to cover any tax due on their earnings as independent contractors. If your withholding is not adequate to cover the amount of income tax you owe on your Form 1099 income, you can increase the amount withheld from your paycheck.
When your W-2 withholdings are not enough to cover the income tax on your Form 1099 income, you will need to make estimated tax payments each quarter to the IRS using a Form 1040-ES, Estimated Tax for Individuals. The withholdings or estimated payments must total at least 90% of the tax owed for that year or 100% of the previous year’s tax. Should you fail to make adequate withholdings or pay quarterly taxes on your Form 1099 income, you may be required to pay a penalty when you file your personal Form 1040.
Use a free quarterly tax payments calculator to accurately know how much you should pay for your taxes.
Reporting Income From Forms W-2 and 1099
The process for reporting your Form W-2 income is relatively straightforward: you list the income from Line 10 of the Form W-2 on your Form 1040, Individual Income Tax Return. You then list any interest, dividends, retirement accounts, or Social Security benefits you have received on lines 2a through 5b.
Reporting your Form 1099 income on your Form 1040 is more complicated. If you have a profit or loss from self-employment, you must also file a Form 1040 Schedule C for each business you operate. Schedule C is for reporting income from a sole-proprietorship, which is a business owned by a single individual. Schedule C is part of your individual tax return and not a separate business tax return.
Line 1 of Schedule C should list your total business income for the year, usually as reported on the Forms 1099 you have received. If your business sold goods, you then subtract the cost of goods sold from that amount. This will be your gross income listed on Line 7. If you did not sell any goods, then enter your business income from Line 1 on Line 7 as your gross income.
You then calculate your deductions for business expenses. The deduction categories are listed on lines 8 through 27 in alphabetical order. Your total deductions should then be subtracted from your Line 7 gross income. If you claim the home office deduction, it is listed on Line 30 and also subtracted from your Line 7 gross income. Your gross income minus the total of your deductions is your net profit or loss and is reported on Line 6 of your Form 1040.
Calculating Your Self-Employment Tax Amount
Finally, you will need to file a Form 1040 Schedule SE, Self-Employment Tax, if you have more than $400 in net earnings from self-employment. The net earnings that will be subject to the 15.3% self-employment tax are calculated by subtracting business expenses from your net revenue, then multiplying the difference by 0.9235 (or 92.35% of your net revenue). The odd multiplication number reflects the fact that you deduct 50% of your self-employment tax from the income used to calculate the tax.
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.
Did You Receive a Form 1099 when You Were Expecting a Form W-2?
If you thought you were working as an employee with a company but received a Form 1099-MISC instead of a Form W-2 you will need to contact your employer about your employment status with the organization. It is likely that a mistake was made, but there have been times when business owners have misclassified their employees to avoid paying their share of payroll taxes and cover benefits like health insurance. If you have been misclassified as an independent contractor, you will not enjoy all of the legal benefits conferred upon employees, such as unemployment insurance and workers’ compensation.