Here’s what to expect when you have both 1099 and W-2 income, and how to simplify your tax situation.
The differences between a 1099 and a W-2
First, it’s important to distinguish between a 1099-MISC and W-2. A Form 1099-MISC is the tax form you receive from a company you contracted with. A W-2 is the tax form you receive as an employee from your employer.
The major difference between these forms is the tax section. Companies do not withhold taxes for contractors, so the 1099 will include the full amount that was paid for you. On the other hand, companies withhold taxes on W-2 income for their employees; a W-2 will include your total earnings, plus how much was already withheld in taxes and sent to the government on your behalf.
How does this affect my taxes?
Everyone pays roughly 15% of their income to the government to cover Social Security and Medicare taxes. As an employee, you pay about 7.5% and your employer pays the other 7.5%. As a contractor, however, you pay the full 15% (nicknamed “self-employment or SE tax”).
That means, as a contractor, you pay 7.5% more in taxes than an employee does. However, the tradeoff for this is more flexibility, autonomy and control in the work you do. Additionally, you get more leniency in the expenses you can write off, meaning that you pay 15% tax of a much lower number than most employees do. For example, employees can’t write off commuting costs, but you can as a contractor if you’re commuting to visit a client.
How does QuickBooks Self-Employed help me pay my self-employment tax?
Your self-employment tax is only based on your 1099 earnings. However, your income tax is based on both your 1099 and W-2 earnings, so having both types may increase your income tax bracket. QuickBooks Self-Employed tracks your income, spending, and allowable expenses to calculate quarterly estimated taxes.
What do I need to send to my client?
Your client may ask you to fill out a W-9 if they need to send you 1099 in future. If your client is using QuickBooks Online, they can invite you to their company as a contractor and you can manage your W-9 information in QuickBooks Self-Employed. Otherwise, you will need to obtain and complete Form W-9 to send back to them.