What's The Difference Between A 1099 & A W-2? It's All About What Kind Of Worker You Are
This is the funnest time of year, because everyone is getting ready to file their taxes! ...And by this, I clearly mean that I'd rather stick screwdrivers in my ears. We recently talked about estimated taxes and 1099s; now, let's cover another important question: What's the difference between a 1099 and a W-2? As hardworking individuals, many — if not all — of you fall within a certain category: You're either a salaried employee, or you're self-employed. Or you're both. But they're different. And the taxes are different. OK, let me explain the basics first.
If you are a non-salaried worker — a freelancer, consultant, independent contractor, etc. — then you are likely familiar with a 1099. This form applies specifically to you, and it details the income you earned from a specific client for the previous year, pre-tax. The people or companies that you work for are required to fill it out and send it to you by Jan. 31 every year. If you don't receive this form, there are two possible reasons why: Either you didn't make at least $600 during that tax year from that client, or the client simply failed to file. Regardless, you should still report all income!
If you are a salaried employee, however, then you should receive a W-2. This form lists all of the income you earned from your employer during the tax year, and it includes deductions taken from that income for state and federal taxes. This means that you've already paid your taxes on this income — easy peasy.
This is probably the biggest different between a 1099 and a W-2: As a W-2 employee, your payroll taxes have already been removed from your paycheck and sent to the government through your employer. As a 1099 worker, this has not yet happened. This means that you are responsible for calculating your own taxes and then submitting them to the government. You do this on a quarterly basis; they're called estimated taxes, or, colloquially, quarterlies.
This is also one of the more stressful things about being self-employed. If you are salaried, the government gets its money every time you get paid; furthermore, when tax season rolls around, there's a good possibility that you'll actually get some of that money back. (And nothing gives you the warm tinglies like a tax return, am I right?) As a freelancer, however, you pay taxes as payments, and it's not nearly as gradual. That makes it seem like you're paying a whole lot more, but I've had more than one CPA tell me that the amounts are about the same. Regardless, I about peed my panties my first year as a freelancer when my CPA told me I owed $3,300. I wanted to set myself on fire.
There is one pro to being self-employed when tax time comes around, however: Deductions. Deductions are your friend. Make nice with deductions. Take deductions out to dinner. Woo them a bit. I work from home, which means that I get to deduct a percentage of my rent based on the square footage that my home office occupies. Supplies I buy that are for my business are very likely deductible. If I do a lot of driving for work, a certain portion of my gas is deductible. You can't deduct everything, but as a freelancer, it's in your best interest to at least ask your CPA about this. Salaried employees can't deduct nearly as much as non-salaried ones; at the same time, though, employers of salaried workers typically compensate for or reimburse a lot of things to begin with, so there's that.
If you're self-employed and think you're going to get sneaky with your taxes, don't even chance it, because the IRS is cracking down on this more and more. They've already established specific guidelines to define who is a W-2 employee and who is a 1099 independent contractor, largely because many companies are trying to list their employees as independent contractors, when they're not — something that has led to billions of dollars in lawsuits, back wages, and fines.
The differences between these two kinds of workers are pretty clear cut. For example, a W-2 employee works hours set by the company, typically on a fixed schedule. A 1099 contractor usually determines their own work schedule.
On a final note, it is totally possible that you are both kinds of workers; thus you will receive both forms: A W-2 should arrive from your employer, and 1099s should arrive from your clients. This was my case for a little while, since I worked a nine-to-five desk job and freelanced on the side.
Tax season is oftentimes one enormous migraine. If doing your taxes on your own is too stressful (total understandable), hire a professional to take care of it for you.