Today, lots of people work as employees and have their own businesses on the side. Good examples are employees who moonlight as part-time drivers for Uber or Lyft. Here’s how to file taxes when you have a W2 and 1099.
1099 and W2 tax checklist
We’ll dive into the specifics of your filing requirements below. But, here’s what you need to know about filing taxes with a 1099 and W2.
- Your taxes will be slightly more complicated than if you only had a W2
- You’ll need to file IRS Form 1040
- The profits or loss from your 1099 business can pass through to your W2 income
- Deductions for W2 employees are limited to a percentage of your AGI
- Independent contractors can deduct virtually any business expenses
Paying taxes with a W2 and 1099
Employees are often referred to as W-2 employees. Employers report their wages and other compensation to the IRS on Form W-2, Wage and Tax Statement. 1099 workers are sometimes called “non-employees” or freelancers or consultants.
Their companies report their payments to the IRS on Form 1099-MISC, Miscellaneous Income. Non-employees who sell their services to others are also called independent contractors.
Your taxes will be more complicated if you are both a W2 employee and a 1099 independent contractor. You’ll need to file IRS Form 1040, not the shorter Form 1040A or 1040EZ.
W2 income and tax deductions
When you work as an employee, your employer will file Form W2, Wage and Tax Statement with the IRS by January 31. They will also provide you with a copy.
The W2 form will show your total taxable compensation for the prior year and the total tax withheld from your pay and sent to the IRS. This information includes withholding of income tax and Social Security and Medicare taxes. Your employer was also required to pay half of your Social Security and Medicare taxes out of its pocket.
You must list your total taxable employee compensation on the first page of your Form 1040. Add it to any other taxable income you had for the year to figure how much tax you must pay. You must also include a copy of your W2 with your return.
1099 income and deductions
When you work as an independent contractor, any hiring firm that paid you a total of $600 or more during the year is required to file a 1099-MISC form with the IRS listing the total amount of such payments. You needn’t attach copies of your 1099s to your tax return. Just make sure you report all the income shown on your 1099s; if you don’t, you’ll likely hear from the IRS.
Independent contractors typically work as sole proprietors. When you’re a sole proprietor, you and your business are one and the same for tax purposes. You list the profit you earn or losses you incur on the first page of IRS Form 1040.
If you earn a profit, your employment income includes the money and any other income you have. Interest income, or your spouse’s income if you’re married and file a joint tax return, also count toward the total taxable amount. If you incur a loss, subtract it from your other income, and it will reduce your taxes for the year.
To show whether you have a profit or loss from your sole proprietorship, you must file IRS Schedule C, Profit or Loss From Business, with your tax return. On this form, you list all your business income and deductible expenses. You subtract your total expenses from your income to determine if you earned a profit or had a loss.
List of deductions for 1099 workers
Almost everything you buy for your business is deductible. They are deductible in full. Frequent expenses for independent contractors include:
- Attorney and accounting fees for your business
- Car and truck expenses
- Costs of renting or leasing vehicles, machinery, equipment and other property used in your business
- Depreciation of business assets
- Education expenses
- Expenses for the business use of your home
- Fees you pay to other self-employed workers you hire to help your business
- Health insurance for yourself and your family
- Insurance for your business
- License fees
- Office expenses and utilities
- Professional association dues
- Retirement plan contributions, and
- Business travel, meals and entertainment
When you work as a 1099 independent contractor no income, the firms that hire you withhold from your compensation Social Security or Medicare taxes.
Ideally, you prepay these taxes four times a year by paying a series of estimated taxes every quarter. If you don’t pay enough estimated tax during the year, you may have a hefty tax bill due with your annual return.
You must file IRS Schedule SE, Self-Employment Tax, to calculate and report your Social Security and Medicare taxes. Pay these along with your income taxes.
If your employee wages exceeded the annual Social Security tax limit, you wouldn’t have to pay any Social Security tax on your 1099 income. For 2019, the wage base increases to 132,900, so an employee with wages up to or above the maximum in 2019 would pay $8,239.80 in tax and the employer would pay an equal amount.
Regarding Medicare, you must pay the Medicare tax on all your employee and 1099 self-employment income, no matter how high.
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MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.