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1099 Vs. W-2 Taxes

Employers classify people doing work for them as an employee receiving a W 2, or an independent contractor receiving a 1099. For work purposes, employees are under the control of the business. Conversely, independent contractors have flexibility and less direction. Encountering the option to be an employee or an independent contractor, is common. Although it is common, this choice carries implications for you surrounding time, responsibility and tax.

  • Employers issue Internal Revenue Service, or IRS, form W 2 for employees at year-end. Form W 2 reports your annual income, in addition to Social Security and medicare payments, and federal and state income tax withheld. 
     
  • Businesses issue IRS form 1099 MISC to independent contractors at year-end. The form reports the gross proceeds you received during the year. No tax withholding payments are made on your behalf and you are responsible for self employment tax, or SE tax.

  • Employees are required to pay a portion of employment taxes, which are composed of Social Security, Medicare and federal unemployment. Employers pay federal unemployment, although employees are responsible for half of Social Security and Medicare taxes, which equate to 7.65 percent. Independent contractors pay SE tax, which is the same as employment tax less the unemployment component. As an independent contractor, you are responsible for the entire amount, which is 15.3 percent.
  • Employers often have benefit packages that you would not otherwise be able to afford or deduct. The tax-deductible benefits reduce your box 1 gross wages, lowering the amount of wages you report on your tax return. You can deduct health insurance and retirement plan contributions as an independent contractor, although you must do so on your tax return at year-end, rather than through payroll deductions like employees. Because you deduct these benefits at year-end on your tax return, you keep less money in your pocket from benefits during the year.

  • Independent contractors do not have taxes withheld. Contrary to popular belief, this does not mean you are not required to make tax payments during the year. The IRS requires independent contractors pay 90 percent of the current year tax liability, or 100 percent of the prior year's tax liability for earnings less than $150,000, in the form of estimated quarterly payments.


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