Wednesday, March 19, 2008

W2 vs 1099-Misc: Employee vs Independent Contractor.

If you are an employee, then your employer will issue you Form W-2, which will show your total income from the year and various taxes withheld from your paycheck.

If you are an independent contractor or a self-employed person, the company or the employer whom you provided your services will issue you Form 1099-Misc, which will show the total payment made to you in the year. Sometimes, even when you are a regular employee, for some extra payments to you (like bonus, car mileage expenses or per Diem expenses), your employer may issue you Form 1099-misc. Normally on the 1099-misc payments, the employer/company will not withhold any taxes from your payments. This 1099-misc income is treated as self-employed income (even if you are a regular employee). A self employed person must file the tax return if the self employed income is $400 or more.

W2 -- You are an employee
From your income Social Security and Medicare taxes are withheld at 7.65%. The Social Security tax is withheld at 6.2% of first $97,500 of wages for 2007 ($102,000 of wages for 2008) and the Medicare tax is withheld at 1.45% of your entire wages. The employer must also pays his part of employment taxes at 7.65%.

You normally can't claim expenses associated with the job unless you itemize your deductions. Also your business related (job related) expenses are subject to 2% AGI limit, which means that if your AGI is $50,000, then $1,000 of your employee business expenses are not deductible.

An employee can deduct business related expenses only if he/she itemizes the deductions on schedule A (Form 1040). You will normally itemize your deductions only when your itemized deductions are more than the standard deduction. All for all the unreimbursed employee expenses, you must complete Form 2106 or 2106-EZ.

1099 -- You are independent contractor
If you have expenses associated with your 1099-Misc income, you must file Schedule C (Form 1040) on which you record your income and expenses. The net income from schedule C (Form 1040) is reported on line 13 of Form 1040 or 1040NR. If you do not have any expenses associated with your 1099-Misc income, then you can directly report this income on line 13 of Form 1040 or 1040NR.

On your net income on schedule C that you report on the line 13 of Form 1040 or 1040NR, you will pay SE (self employment) taxes at 15.3% (12.4% social security tax plus 2.9% Medicare tax). For SE taxes you will complete schedule SE (Form 1040). If you are an "exempt" (nonresident exempt form residency) individual, then your income is not subject to SE tax. The SE tax amount from schedule SE (Form 1040) is reported on line 58 of Form 1040. One-half of the self-employment taxes is deducted from your total income as adjustment to your income on line 27 of Form 1040.

With 1099-Misc, the employer does not have to pay their part of employment taxes of 7.65% and some other taxes. They save headache of keeping another person on their payroll.

For you the advantage of being an independent contractor is that you can deduct your expenses directly on schedule C (Form 1040) and you can still claim the standard deduction. An employee can claim expenses only when he/she itemizes the deductions, and then they don't get standard deduction.

W2 & 1099-Misc From the Same Employer
Many time your employer will issue you a W2 for the wages paid in the year and 1099-Misc for other payments. If an employer makes a payment to an employee other than the wages, and the employer does not ask the employee to account for the expenses (the unaccountable plan), then they issue 1099-Misc. Such income is reported on schedule C (Form 1040)-- Profit or Loss from Business (Sole Proprietorship). This is the proper IRS form to report income reported on 1099-Misc. And, on this form the employee can directly deduct his expenses to earn the 1099-Misc income.

Form SS-8. Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
A firm or a worker can file Form SS-8 to request determination of status of worker for purpose of federal employment taxes and income tax withholding.
For more information read
1. Tax Topics - Topic 762 Independent Contractor vs. Employee

List of Articles
Your Filing Status
1. Filing Status for Married
2. Filing Status: Head of Household
Exemptions for Dependents
1. Requirements for claiming a dependent
2. Child of separated or divorced parents
Filing Requirements
1. Filing Requirement for a Dependent
Your Income
1. W2 vs 1099-Misc: Employee vs Independent Contractor
2. Tax Filing by Self Employed Sole Proprietor or Independent
3. Filing W4 Employee’s Withholding Allowance Certificate
Your Foreign Income
1. U.S. Citizen or Resident with Foreign Income
2. Foreign Bank and Financial Accounts
Income Adjustment and deductions
1. Moving Expenses
2. Itemized deductions
3. Student Loan Interest Deductions
Income Adjustments -- Retirement Plans
1. Trad IRA and Roth IRA
2. Elective Deferrals 401(k) Plans
Status of Your Tax Refund
1. When will I get my tax refund?
U.S. Gift tax and Inheritance Tax
1. The U.S. Gift Tax
2. Tax on Inheritances
Sale of Your Home
1. Profit from the Sale of Your Home
2008 Economics Stimulus Act
1. Are You Eligible for 2008 Stimulus Tax Rebate Payment?
2. 2008 Economics Stimulus Act -- Benefits to Businesses

Tax for Aliens
1. U.S. Tax Filing Requirements for Non-Residents
2. Substantial Presence Test
3. Social Security and Medicare (FICA) Taxes for Non-resident Exempt Individual
4. U.S. Tax Treaties for Professors, Teachers and Researchers
5. U.S. Tax Treaties for Students and Apprentices
6. Mandatory Reporting of Foreign Bank and Financial Accounts

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Anonymous said...

While reporting the amounts on form 1099 MISC, if you are not self employed, where to report amount you have in column 7 under nonemployee compensation?

MyTaxes said...

This income cannot be treated as wages. It is what you earned independently and IRS wants it to be reported on Schedule C (Form 1040).

Phillip Bell, EA said...

Careful -- issuance of a 1099 doesn't always mean that you are self-employed. For example, a car salesman often receives a W-2 from the dealership and 1099-MISC from a car manufacturer. The salesman isn't self-employed in this case and not liable for SE tax. The earnings from his 1099 are through his employment with the dealer, but because the manufacturer doesn't employ the sales person they can only issue him form 1099. I have seen similar cases where school teachers are participating in-class studies -- they are not self employed and not liable for the additional 15.3% tax.

Long story short consult a tax pro.