1099 income types
It’s March and tax season is right around the corner. Normally, I am frollicing around the city, enjoying the beautiful weather and dancing at SXSW shows. This year is different.
Why? 1099 income.
I’ve spent most of my professional career earning W-2 income. This means my taxes were automatically withheld from my paycheck each month and come tax season, not only could I could quickly file return, but I also received a pretty nice refund a few weeks later.
Beginning 2015, I chose to pursue a different path. One that allowed me to work on my terms and didn’t require I formally commit with any single company. Turns out, with great freedom comes great responsibility.
At the beginning of January, I started receiving several 1099 income tax forms. Organizing my business expenses, keeping up with my tax forms and filing a return has been a killer task. Learn from my mistakes by reading 5 important things to know about 1099 income.
1099 income is any non-employee income you receive. Common sources include interest income, dividend income, retirement withdrawals and self-employed or independent contractor income.
How is 1099 Income different than W-2 income?
Simply put, 1099 income and W-2 income are forms that report income for two different types of workers.
W2 employees have their payroll taxes automatically deducted from their paychecks.
1099 independent contractors, freelancers or self-employed individuals are responsible for paying their own payroll taxes on a quarterly basis.
Can I deduct business expenses as a 1099 contractor or W2 employee?
Both W2 employees and 1099 independent contractors, freelancers or self-employed individuals may deduct qualified business expenses to reduce their tax bill.
For a complete list of W2 employee deductible expenses, check out IRS publication here.
For a complete list of 1099 deductible expenses, check out IRS publication here.
What if I don’t receive a 1099 for work I was paid on?
In some instances, you may not receive a 1099 for work you completed during the year. Maybe your employer has your old address or they simply do not provide you with a 1099 form. Unfortunately, this doesn't mean you are off the hook.
You are still responsible for reporting all income whether a 1099 was received or not. You do not need to provide a copy of your 1099 to the IRS, but you are responsible for reporting the income as Schedule C income.
I am an Entrepreneur. Am I responsible for sending 10&99rsquo;s?
As a business owner, you must issue a Form 1099-MISC to each person to whom you have paid at least $600 in rents, services, prizes and awards, or other income payments.
Penalties for failing to send out a Form 1099 can range from $30-100 per form.
Can I Deduct Wages Paid With a 1099 on My Income Taxes?
The tax laws requiring the issuance of a form 1099-MISC to independent contractors earning payments in excess of $600 in a calendar year apply only to businesses, as do tax deductions related to the payments. However, individuals engaging workers for the performance of services may face other reporting requirements, while individuals who receive the 1099-MISC for earning income may be eligible for deductions or adjustments to gross income.
The 1099-MISC form allows for the reporting of numerous types of miscellaneous income that is differentiated from wages earned by the lack of a formal employer-employee relationship. The form requires the listing of both the payer and recipient's name, address and taxpayer identification number along with the total income received. In many instances, the 1099-MISC reports non-employee compensation paid out to individual independent contractors or other businesses, but it also features spaces for rents, royalties, attorney payments and other income.
Independent contractors who receive the 1099-MISC to report non-employee compensation are able to claim tax deductions for expenses incurred to earn the income. IRS form Schedule C allows sole proprietors to report both expenses and income and claim a profit or loss which is then reported on Form 1040, U.S. Individual Income Tax Return. However, certain types of income reported on the 1099-MISC may not allow for tax deductions. For example, royalties earned from book sales are not considered self-employment income if you are not a writer by trade. The royalty income reported on your 1099-MISC form would not be eligible for any tax deductions. Similarly, the winning of a sweepstakes prize with a cash value in excess of $600 requires the issuance of a 1099-MISC with the value listed as "Other income." In a random drawing, no qualifying expenses would be incurred to enter, therefore no tax deductions would exist.
An adjustment to gross income is not a tax deduction but does reduce an individual's total gross income before tax credits and the standard or itemized deduction are applied. If you are the recipient of a 1099-MISC with income that requires the payment of self-employment taxes, you may deduct half of the self-employment tax paid on Line 27 of Form 1040. This adjustment to your income applies whether or not you were entitled to additional deductions.
When you engage an individual, such as a plumber or landscaper, to perform a service and let the contractor control how the work is done, you are not required to send the worker a 1099-MISC, even if payments exceed $600, as long as the work is for private, not business, purposes. Instead, the contractor must report the earnings to the IRS. If you do control the execution of the services and create an employer-employee relationship with the worker, do not issue a 1099-MISC. Instead, provide the employee with a form W-2, Wage and Tax Statement, and begin the process of withholding and submitting Social Security, Medicare and income taxes to the IRS on behalf of both your and the employee. The wages paid to a household worker, such as a nanny, maid or gardener, are not tax-deductible.
Ashley Mott has been self-employed since graduating high school. She started an e-commerce business in 2005 that utilized pre-existing websites to market antique books, retail clothing and liquidated beauty products. In 2008, Mott began her "for-profit" writing career and currently writes for a daily newspaper in Northeast Louisiana.
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1099 vs. W-2: How Independent Contractors and Employees Differ
In this economy, many businesses are trying to cut back on full-time staffers by hiring contractors to do the same work instead—minus the expensive benefits. As a result, it can often be difficult to tell employees and contractors apart. But there are significant differences, both in terms of workers’ personal bottom lines and in the eyes of the IRS.
To better understand the nuances between the two designations—and what to do if you think you’re being misclassified—we talked to Jaime Campbell, a CPA with 10-plus years of experience.
Simply put, 1099s and W-2s are two separate tax forms for two different types of workers. If you’re an independent contractor, you get a 1099 form. If you’re an employee, you receive a W-2.
As a W-2 employee, payroll taxes are automatically deducted from your paycheck and then paid to the government through your employer. If you’re a contractor, you are responsible for calculating your own payroll taxes and then submitting the sum to the government on a quarterly basis.
When it comes to who should be classified as an employee and who should be considered an independent contractor, Campbell says that the key word is “control.” In other words, “it’s all about who controls the work you do,” she says.
This article excludes a huge number of employees who are contracting through agencies on site for a long duration. I am paid on a W-2 by a staffing agency which means I have no job security, no benefits, and still can’t deduct most things. I have little control over my hours and work on site at one company until they decide they don’t need me any more. As far as I can tell, it’s the worst of all worlds, but my industry is going more and more that way. The worst is that I have no 401K option and the health insurance is both crappy and $450/month for just me.
Well, it doesn’t technically exclude you. You are a W-2 employee of the staffing agency. I think the article does go overboard in describing the benefits of W-2 employment; after all, most W-2 employees at McDonald’s don’t have benefits either, and they don’t have job security.
But those aren’t the main hallmarks of being a W-2 employee. They don’t even mention the biggest one; that as a W-2, your employer pays half of your Social Security tax, as well as withholding other taxes on your behalf, AND when you’re a 1099 contractor, you end up with a big tax liability after your first year if you don’t know what you’re doing (and in my experience, most don’t). When you are self employed, you have to pay your own employee taxes as well as your own employer taxes.
But my point is that it sort of assumes that those of us who are “employees” get benefits, which I don’t. And, I’m treated as a contractor where I actually work (which is not at the staffing agency). So, yes, technically I’m an employee of the staffing agency, where I work I’m treated as a second class citizen and I’m ineligible for all the benefits. My office calls me a contractor.
I’m with you Liz – a contractor who works for/at a different company. I like because I’m making good money, but I HATE feeling like a second-class citizen. I also hate not having real vacation or sick time. I spent all winter hoping I wouldn’t get sick – because if I’m not at the office, I don’t get paid. Same for holidays like Memorial Day. The office is closed, so I make less money. It’s a bummer in that sense. Requires careful budgeting.
The other thing that is not great about being a contractor is when a project is canceled and you are unexpectedly out of work. I had a proposal project canceled in the middle. I ended up with much less money that year but still as a W2 paid high taxes on little income. Our tax structure is criminal right now.
This was my case when I worked at a Military Hospital. I wasn’t a government employee, so I didn’t enjoy all the benefits of being a government employee. However, I was a W2 employee of the staffing firm that held my contract, and DID enjoy the benefits of being an employee of that firm (which were better than those of a government employee). That included 401K match, health insurance (until the ACA screwed that up), vacation, etc., etc. The only difference was that I didn’t actually work at the firm, I worked at another location. It’s the same as if say, you work for Geeks On Call, and they send you to Bob’s Factory to install a server. You don’t work for Bob’s Factory, you work AT Bob’s Factory doing work FOR Geeks On Call. So, of course you aren’t going to get compensated from Bob’s. Bob’s pays Geeks On Call, then Geeks On Call pays you. When you’re a W2 contractor on a long-term contract, you most likely have a permanent seat AT the target location. But at the end of the day, it’s the same scenario. Your work location pays your firm to have work completed, and your firm hires you to do the work.
I seriously doubt you were a contractor with better benefits than a federal employee. I have family who are federal employees and no contractors I have ever met got better benefits.
Articles that tell workers that they should be classified as a W-2 employee instead of a contractor are all well and good, but we can’t necessarily change anything. I used to get a W-2 from my side job but my employer decided to start giving me a 1099 and no raise to compensate for self-employment tax. It sucks, but I still need the money so I can’t quit.
There is a 3rd option to the company releasing control or reclassifying you as an employee. Make a big deal about it, and they simply fire you.
my son has worked for his company for almost 2 yrs now all of a sudden they decide he will now be a independent contractor can they do this they are taking his earned 1 wk vacation away from him seriously can they do this
i’d speak to a labor lawyer about that. even if they fired him they would still have to pay him his vacation days.
No actually they don’t. The only thing that the labor department cares about is payment for actual work or that should have been paid for actual work. Vacation is a specific exclusion. Even if there is a pre-employment contract, the DoL does not regulate vacation pay. That would have to happen at the state level for a breach of contract with an attorney, but it would not affect either the Feds or the State with respect to enforcement. I will say, this in defense to what you were saying…IF a state has its OWN laws regulating vacation pay, then that certainly trumps this. But the IRS does not regulate vacation level, and not every state has this provision…most don’t…so it just depends on where someone is located…but it cannot be held under a blanket statement that they “have” to pay for unused vacation…it just depends on the state where the employee is working…
I bet the same people that complain here are the same people that complain about how evil Unions are. I have heard so many people over the years downing on Unions but now now America is waking up to being abused by these big corporations and realizing they have no retribution.
i drive a shuttle bus for a company on weekends.i do this as a part-time job.i was just notified that starting this year i am now a contract worker.i use their vehicles to transport all customers.this doesnt sound right.does anyone know if this is right?
Don- What company do you work for? No- this does NOT sound right at all. What if you hurt yourself on the job.
I own a small landscape company and had only 1 employee last year and hope to have between 2-5 this year, and will probably pay them as Independent Contractors as the administrative cost to issue checks would take away from the employees pay. Once I get over 4 or 5 employees, I’ll probably start W2′s, I just want my employees to get the most I can pay them.
JC – I stumbled across this website looking for some info to help one of my clients who is trying to persuade his 1099 contractors to become 1099 (stability, tax compliance, time-off, etc). I set up payroll for small business owners like yourself, seasonal and year-round, for as few as 1-2 employees. Let me know if you want to talk about these administrative costs – chances are they’re much less than you think! [email protected]
Thanks Ashley, I’ll keep you in mind.
I dont know if this right.. This is y first time to work in.i have a green card holder,and my boss is a filipina…first I ont know the policy.here in u.s…so she gave me an agreement..when I was worked their in my 1st season,she said that myMONTHly salary is $1000 cash and $1000 cheque means cheque are those deduction for my benefits,and free ticket back an forth..but my time 12hrs every 6x a week.but for me thats fine as long are they kind..my 2nd season they increased my salary maybe because they know how im a how im a hard worker,trustworthy,loyal,helpful etc..$1000 cash $2000 cheque…i work 12-14 hrs…i wake , I treat them my family .i sleep 11pm or sometimes2am because of them and to my work….after my season ,my boss doesnt gave my free ticket,and she did not to inform me before the seasons end.of course everybody knows that we should book early so that we can find cheap ticket,she told me that day the end of mu seasonthat she cannot afford to buy my ticket.
It depends on whether you have control over what they do and whether you provide them the tools/resources to do their jobs. If you are providing rules/regulations/policy etc and/or providing the means for them to do their jobs, then they are W-2 employees, regardless of whether you have 1 or 1000 of them. If you are wanting to find an alternative, then may I suggest using an employee leasing company who can take that burden off of you.
“Then the company will generally have two options: Either they’ll have to release control, increasing your freedom over your work and schedule, or they’ll have to reclassify you as an employee and start providing you with the benefits, tools and infrastructure due to employees.” Nope. The author missed another very popular option used by employers. They can terminate you. Under ‘at will’ employment, they don’t need a reason beyond ‘we feel like it’.
That is true within some boundaries though. It is an at-will employment, and you are right that they missed that option. I thought about that myself. But, the only standard that has to be applied is that if they provide a reason, the same standard must be applied to everyone who falls in the same category. Meaning, if they fire one for wearing a blue tie, they must fire everyone who is wearing a blue tie. Where employers really mess up is in giving a reason in the first place. Even if there the employee has been with the company for 10 years, the best bet for the employer is to just say “this isn’t working out, so good luck” and leave it at that. Once they give a reason, though, there is a greater burden of proof. If they cite something like poor job performance then there has to be a documented history of it to really hold up in court. Most employers really goof up, even though they are at-will, in giving an explanation…
Be very careful if your company wants to convert you from a W-2 employee to a 1099. Often, companies that are in trouble will do this. If you’re 1099 and get let go, you dont’ get unemployment insurance benefits which you receive if you’re a W-2 employee.
Also, many states require that you get paid for any unused vacation when you leave a company or are converted to 1099.
Personally, I left W-2 employment to go 1099 full time because I can make a lot more money even after the additional taxes. This isn’t always the case, though.
I guess it depends on whether you value the income more than the benefits. Benefits are just another way for employers to pay less.
Aplanbforme.com Do something that makes sense!
Does a small 1-man business run the risk of trouble with the
IRS in the following scenario? This
1-man business has not had the need or the stable revenues to support W-2
employees, so the business has paid a couple of people as 1099 contractors when
some help was needed. In the middle of
the year, the business need for permanent employees and revenue level rose to a
point where hiring W-2 employees was necessary and possible. The business then hired the two 1099
contractors as full-time W-2 employees. Obviously,
the result is two people that had income reported on a 1099 and a W-2 in the
same year. I discussed this scenario with a local accountant and she was
adamant that this was not something that should be done. Your thoughts?
It still goes to control, Mike. If their duties require them to follow certain regulations that you set into place where you set the boundaries (dress code, working hours, etc) and/or if you provide them with the tools to perform their jobs (physical tools, computer equipment/software…even MS Office), then they are W-2 employees. There is another alternative, though…that is an employee leasing company…they are specifically tailored to helping businesses with fewer than 50 employees and can take away a lot of the burden with this…
Thanks very much for the reply and the good information. What I really curious about is if the employer decides to hire a 1099 contractor as a full-time W-2 employee, does the employer run into trouble with the IRS for paying a person by 1099 and W-2 for the same year?
Mike, first my apologies for being behind in answering. Was out of pocket for 2 months.
I do not see the problem with this in that there are situations, particularly with startup businesses, where someone might come in as a consultant first and then sign on as an employee. For the contractor portion where no taxes are filed on behalf of the individual, then 1099 is acceptable. Once the business is in operations, assuming they decide to come in as an employee, then you switch to W2 based on the control I mentioned. I have done this many times including my most recent job. I started as a contractor to do some computer programming and was paid according to my hours, but I was free to engage in other activities and met the criterion of contractor. Once the project was complete, the owner offered me a full-time salaried position. That year I had both 1099 and W2 because of the time in which I was paid for both. I am currently about to do the same thing with a friend of mine next year. I am helping him set up a restaurant from the ground level and will be working as a contractor for the first few months until the company begins operations. If, at that time, he wishes for me to remain on full-time, I will go on a salaried position that he would then pay my portion of MEDI and FICA plus Unemployment. For the first 3 months minimum, I will be a contracted position where I will have nothing paid on my behalf and will be fully responsible for all taxes. I will fit the criteria of a contractor during that time and will be able to freely set my own hours, supply my own supplies, and engage with other companies if they do not violate the NDA that I’ll have in force. The control would shift upon full-time employment. Next year, I will have both 1099 and W2. I have had this many times over the past 25 years. It is perfectly acceptable, unless there is some weird rule that I’m not aware of that has changed recently. It goes to control at the time that the payments are being made and the circumstances under which they are made. If your friends are acting in the capacity as contractors and fit the control/supply criteria at that time, they qualify only for 1099s. If circumstances change that allow them to come in as employees as defined by the control/supply test, they would get the W2s for that portion of time. I really do not see a problem with this, unless there is something else that I am missing.
At the end of the day, we (employers) don’t have the luxury of deciding if we want to treat a worker as a independent contractor or employee. That is determined by the IRS. They set out very specific criteria which defines the relationship. In other words, if someone fits the profile of a full time employee, but an employer want to call them a 1099 contractor just for convenience, it really doesn’t fly, and the employer is still liable for employee type expenses. I recommend searching how the IRS defines this criteria, and complying.
What do you mean “don’t have the luxury of deciding” ?
The criteria is clear – as stated in the article – the degree of freedom and control.
I am a massage therapist working in Virginia as a IC. I strongly feel that we should be employees as we have specific job training requirements, uniforms, mandatory meetings and strict rules which have specific repercussions if not followed. What recourse do I have to alter this situatuon?
Ok got one of my questions answered on an employee with both 1099 income and then hired by us now has w-2 income….this works.
Now BIGGER PROBLEM….at the same time that my husband hired the above 1099 contractor as a full time employee, he decided to use a payroll company. He put himself and the new employee on the payroll. Ok for the employee, but for my husband as self employed, it is not working out well while I am doing the taxes.
Because I enter the information from his W-2 first, then all the company 1099 information next, it is combing the 2 for our total income. Which is obviously not the case. The amount on his w-2 comes out of the total of the 10&9′s. But since it is combining the two types, it now says we are too high of income to receive Child Tax Credit.
As well as much of the money from the 10&9′s goes to other guys salary.
I am guessing that down the road in the tax return, that I will get credit for the expenses paid to the employee’s salary plus what my husband has paid himself through the payroll company. But that will be too late for the Child Tax Credit.
Should he have not used the payroll company for himself? What other help can you offer?
Thank you for this information. I was a 1099 employee at a documentary company, where I worked steady hours 2-3 days a week. The days would change if I had other gigs going on during the week, but I worked every week for nearly a year. I thought I should have been a W-2 after a while, but I think now I can get how I would have been thought of as a W-2 given my flexibility to change the schedule.
what about as a contractor I’m being forced to be an employee by either the company or IRS? How to I reserve my right to maintain as a contractor? Their claim is that they pay me a monthly check with somewhat consistent amount. I really don’t care about the benefits, I just want to maintain my 1099 filing. How do I go about that? Thanks
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My boyfriend is a welder. He was hired as a 1099 sub contractor, yet he is made to punch a time clock. He is to get paid when jobs are completed. It should be, ( when his part of job is complete) it’s not. In fact company owes him about $10,000. Company keeps saying, “the money is coming.” That never happens. Every once in awhile he will get paid $500.00, $1000.00.
Company acts like they are doing him a big favor. All 1099s are treated same way. They end up quitting never to get paid. He ignores demand for payments from labor board.
How would the beauty industry fall into the different types of statuses? I’m an esthetician and I have scheduled days that I work. I don’t receive a W-2. I get 60% commision of all services that I do. Some supplies are provided for me and others I purchase myself. I feel like this category definitely falls right in the middle. I do have a choice on which services I want to do, I have a set price which I came up with, but I can discount, do special, and lower prices per customer if I want. Walk-in clients are referred to as in house clientele but if I bring someone in then they are considered mine. I didnt sign a non-compete but if they are in-house clients its not favored to give them my cell phome number. What would I be considered exactly?