Sometimes, businesses pay independent contractors, also known as Freelancers a bigger amount, compared to W-2 employees for a particular project. Consequently, it leads to higher taxable income for the particular freelancers. Learn how to File Taxes When You have Both 1099 and W-2 Income.
But, one of the major setbacks of freelancing is taking into consideration different types of taxes that you need to pay, such as:
- State Taxes
- Medicare Taxes
- Federal Taxes
- Social Security Taxes
Freelancers also need to pay penalties in the form of company-offered benefits like health insurance, retirement plans, paid time off, and a few others. They are usually employed to finish a particular project in a fixed amount of time, instead of doing regular work as a normal employee. Freelancers, who are employed full-time should clear their own insurance along with funding their specific retirement plans as individuals.
Several workers, now, are selecting both styles of work. Along with a full-time job and regular salary with healthcare benefits, several are also involving themselves with freelance projects as part-time contractor for an additional source of revenue. In case you are employed as a freelancer and a salaried worker, it is imperative for you to file Form 1099 together with your fixed tax return.
At the end of the year, you will get two kinds of tax documents, a For, 1099 MISC from any organization with which you have a contract or for whom you have freelanced, and a Form W-2 from your particular employer.
But the question is how such two kinds of income can impact your tax situation?
In this article, we will point out the things to expect when you have both W-2 and 1099 income, along with some options to streamline your personal and business tax returns at the end of the particular year.
Know the Differences Between a 1099 Forms and W-2 Forms
Firstly, it is crucial to differentiate between a W-2 and a 1099 MISC. Businesses may employ two kinds of workers, independent contractors and employees. Form 1099-MISC is a tax form that you acquire from an enterprise with which you have entered a contract with. Form W-2 is a tax form that you get as an employee.
The prime differences between the two documents is the possible tax consequences. In simple words, companies do not suppress taxes for individual contractors who are issued the 1099-MISC forms and the payments are tagged as self-employment revenue.
A Form 1099-MISC will display the full gross revenue provided to you, while a Form W-2 will report the gross wages and the withheld taxes by the employer in the entire tax year.
When taxes are suspended, the tax liability is cut down that may lead to an IRS tax refund.
How Will it Impact My Taxes?
Workers provide a 15.3% FICA tax that is utilized to fund Medicare and Social Security. As a W-2 employee, you need to pay 7.65%, while your employer pays the remaining 7.65%. As a 1099-MISC contractor, however, you are entitled for the entire 15.3% of the particular self-employment tax. Not to mention, you can subtract one part of the self-employment tax on your personal tax return (Form 1040).
Even though your tax return is more complex as a freelancer, you earn flexibility along with independence and a higher level of control on the work you perform.
The fresh tax law applies new limits on a few business expenses like entertainment, meals, transportation expenses, etc. But the Jobs Act and Tax Cuts minimizes tax rates for the seven income tax brackets. That means the taxpayers will have a low tax liability on every dollar of taxable revenue.
The restrictions on business expenses will boost the taxable income while lesser tax rates will cut down the tax liability on a particular amount of income. Such changes will yield a number of outcomes for the taxpayers, based on your personal situation.
Take for instance, the subtraction of local and state taxes are now restricted. The taxpayers cannot make a claim that exceeds USD 10000 deduction for the cumulative property taxes and either sales or income taxes. Consequently, individuals in certain states that have a higher degree of state taxes will have restricted deductions, while their tax liabilities will be a lot more.
If you are an employee and get wages but work as a freelancer, it is crucial not to forget that the employer pays a part of the FICA tax on wages and you subtract the employer share personally of FICA tax on your particular freelancer income.
How to Pay Taxes on 1099 if I have Both Type of Income?
S Corporations, Partnerships, and Sole-proprietorships are considered as pass through entities, since business income is passed via to the personal tax return of the individual. The new tax law offers a subtraction on income created via such businesses.
In case you function with the help of a pass-through entity, you can subtract around 20% of the qualified business income from the total income amount. The deduction cuts down the taxable income and issues a lesser tax liability. A certified accountant will be better equipped to tell what must be added as qualified business income.
Furthermore, the normal deduction for an individual filers has almost doubles to USD 12000 from USD 6350, while the deduction rose from USD 12700 to USD 24000 for the joint returns. Such a tax offers tax benefits for the middle-class tax payers who utilize the normal deduction.
In case your primary source of earning is a full-time job that offers a regular salary, the additional earning that you earn as a freelancer is entitled to a specific tax treatment, so long you function with the help of a pass-through entity.
Possibly, the most crucial, your 1099 earning does not comprise any tax withholdings and you require a strategy to pay taxes on your freelancing revenue. This is correct, regardless whether you are a full-timer or a freelancer, or you work as a salaried individual and freelance too.
Here are some ideal options Available for Tax Planning:
1. Keep Back more of Your W-2 Earning
If you boost your tax withholdings on your given wages, you can utilize the wages to encompass the tax liability to create as a freelancer.
In order to do it, you need to request your employer for a fresh Form W-4. You are required to file Form W-4 when you first begin working for your particular employer. Not to mention, it assists the employer to determine how much amount should be withhold in taxes for you. In a bid to counterbalance your 1099 earning, you can request your full-time employer to hold back more taxes for every paycheck you get.
The advantage of this is the ease, because you do not need to remember to clear the quarterly taxes by yourself. The disadvantage is that it is not very proper, hence your employer is likely to over-withhold the taxes or may be under-withhold the taxes. You can get in touch with the HR team for mode adequate details.
2. Quarterly Payment of Taxes
The second option to pay taxes on the freelancer earning is to ensure estimated tax payment every quarter to the particular IRS.
If the taxes are indebted, you can devise a payment plan to conduct payment for every quarter. As such, you will not need to pay the amount payable in huge quantities and you can guess your payments every quarter, depending on the income.
3. Pay Penalty at Year-End
In case you do not edit your W-4 to include mode taxes withheld, or clear quarterly taxes on the 1099 income, you may be liable to pay a penalty amount that you have underpaid when on April 15th the personal tax return is submitted.
The IRS needs that your estimated tax payments and tax withholdings should total to a minimum 90% of your particular tax for the present year or 100% of the tax for the last year, whichever is lesser. You will need to pay penalty in case you do not fulfill the requirement.
Regardless you are a business owner an employee or a freelancer or a mix of both, comprehending how income payments are classified can help you and prevent you from making expensive mistakes while paying tax.
No one desires to pay more fees or taxes to the IRS. Hence, it is recommended to take a decision to pay quarterly taxes, or hold back adequate from the regular paycheck to include any extra taxes.
Tax preparation are not considered an interesting process, however, it can benefit your bank account at the end of financial year and will allow you to keep more of your money earned.