No matter what your work status, be it full-timer, freelancer, or somewhere in-between I think we can all agree that taxes are THE WORST. Sure they pay for important things like roads, and schools, and a variety of other things that our society needs to function, but at times they can seem needlessly complicated and difficult to get right. Oftentimes freelancers feel the sting of tax woes more than most folks because they are more likely to have a much more complicated tax situation than others. Fear not dear American taxpayer, there’s hope for you yet! Knowledge is in fact, power, and the better you can arm yourself with the right knowledge about taxes, the better off you will be.
There are two primary types of tax forms related to employment income: W-2and 1099. Below I will outline both forms, as well as the pros, cons, in addition to any freelancer specific implications. Ultimately, it’s important that you consult your tax guru because as it happens, I am not a tax expert. I am however, someone who wants you to have some cold, hard facts to have at your disposal.
What are the main differences between a 1099 vs W-2?
There are a few different types of 1099 forms, however, freelancers are usually most familiar with the 1099-MISC. The MISC in this case stands for miscellaneous income that was earned from an employer. Any employer who has paid a freelancer or contractor more than $600 in a year is required to provide a 1099-MISC at the end of the year. The biggest difference between a 1099-MISC and a W-2, is that when you are paid as a 1099 employee, the employer withholds no taxes on your behalf. A W-2 on the other hand is the tax form you will receive from an employer who has withheld federal/state and social security and medicare taxes on your behalf.
Which form should I get from an employer?
Typically the type of work you do is going to determine which form you end up with at the end of the year. If you are working full, or part-time for an employer you are likely to receive a W-2, however, oftentimes companies fail to properly classify contractors and employees so it’s important to know your rights. Generally speaking, if you control the how, when, and where of your work, you would be considered a contractor. Now obviously that is a wild oversimplification and the IRS has very many considerations when determining proper classification, however, that’s the gist. If you do not control those factors, chances are you should be paid as a W-2 employee (and therefore may be eligible for benefits).
What else is there to consider?
No matter what forms you use to report your income, the taxman will cometh. It’s just a matter of whether or not you have a choice in the matter, and what your individual circumstances are. If you only have W-2s at the end of the year, that is going to be a lot easier to manage, and you will have hopefully withheld a sufficient amount of tax so that you either end up with a refund at the end of the year, or at the very least not owing that much.
What if I didn’t make enough somewhere to get a W-2 or 1099-MISC?
Sometimes we do little baby projects for companies, a logo here, a blog post there and whatever it is doesn’t net out to the minimum $600 necessary for an employer to provide a W-2 or 1099 at the end of the year. Well bad news is, you still have to report it to the IRS. Any income that you receive (including that which you have 1099s for) should be reported on a Form 1040 Schedule C, which is where you’ll also take advantage of all those excellent self-employment deductions.
There are obvious advantages and limitations to both types of forms, however, the reality for most freelancers is that 1099s are usually how their income is reported. Since nobody is withholding any taxes for you, it’s so important to remember to calculate and pay your quarterly taxes. Not only will failure to do so result in late payment penalties, but it will also stick you with a pretty scary tax bill at the end of the year. Paying your tax liability in installments over time is a much better way to manage your freelance finances as well as give you a much more realistic picture of your net profit over the year.