Filing taxes is all about taking the numbers off various forms and plugging them into the right places. Two forms that you'll hear referenced are form W-2 and form 1099. What's the difference between these two forms and the type of work (or earned income) that they describe? There are a lot of differences, and each of them impacts your taxes in a major way. Here's what you need to know.
What does it mean to be a W-2 employee?
If you are an employee of a company, and that company paid taxes on your behalf (income, Social Security, and Medicare taxes, for example), you will receive a W-2 for the year prior, generally during the month of January. It'll show how much you were paid and the taxes taken out for various purposes.
With the rise of different kinds of gig work, there's a lot of debate over what constitutes a W-2 employee versus a contractor. For example, if you work for a ride-hailing company like Uber, you'll generally be paid as a contractor, in spite of the fact that Uber tells you when and where to pick up a customer as part of your work. Technically, you can refuse an assignment and keep your job, but it will impact future work you're given. Stay tuned to see how these issues are legislated going forward – and it will likely vary from state to state.
What does it mean to be a contractor?
If you're not a W-2 employee, and instead are a contractor, freelancer, or are otherwise self-employed, if you perform paid work for a business, you'll receive a 1099 form. This form serves the same purpose as a W-2 – showing how much you were paid for the year. It'll be up to you to figure out and pay the taxes owed on that income, however (a tax professional or CFP® professional can help).
And freelancers and contractors pay taxes quarterly, which makes sense. If you were a W-2 worker, taxes would be taken out of your paychecks over the course of the year. While you are responsible for figuring out your own taxes and paying them during the year, you can also write off your business expenses on your taxes.
Other reasons you might get a 1099.
You won't just get 1099 forms for your paid work. Variations of this form are for any kind of income. If you go to the casino to play the slot machines and win big, you'll receive a 1099 form for that income. If you sell items on eBay, via PayPal, same thing, you'll get a 1099 form for that income. Any money you earn can be taxed, based on a variety of factors.
This is yet another way tax planning can be confusing, so work with a tax professional or CERTIFIED FINANCIAL PLANNER™ to ensure you're filing the correct way and not overpaying or underpaying.
Jay Zigmont, PhD, MBA, CFP® is the Founder of Childfree Wealth, a life and financial planning firm dedicated to helping Childfree and Permanently Childless people. Dr. Jay is a CERTIFIED FINANCIAL PLANNER™, Childfree Wealth Specialist, and author of the book “Portraits of Childfree Wealth.” Dr. Jay is the co-host of Childfree Wealth Podcast. His Ph.D. is in Adult Learning from the University of Connecticut.
He has been featured in Fortune, Forbes, MarketWatch, Wall Street Journal, New York Times, Business Insider, CNBC, and many other publications.