Filing a W2 and a 1099

Alternative employment, also known as freelance work, is rapidly replacing the typical 9-to-5, Monday through Friday format for making a living. With so many employment lifers leaving their desks and heading home to continue work, freelance taxes will soon also become more of a norm than a specialty.

If you are a first-year freelancer and have spent the majority of your life filing taxes on a W2, you will be accustomed to having the money for your taxes already taken out of every paycheck, and therefore are likely expecting a tax return, rather than a tax payment. If you left your job at the office mid-year, you will also have to file both a W2 and 1099 at the same time. There are both subtle and major differences in these types of filings, so we will go over them below as the deadline approaches.

How much money can I make on the side before having to file taxes?

Amounts can vary from state to state, but it is a hard number with the Federal Government: $400. At $401, you are responsible to report these earnings to the Internal Revenue Service (IRS). 

The best way to make these payments is with a Schedule C form because many of your freelance clients won’t send you a 1099 form. This is because they are not required to unless they have given you more than $20,000 or have paid you more than 200 times. 

With many freelancers now receiving payments through PayPal or other digital transfer services, a Schedule C form is a catch-all for any payments, on any platform. When filing with a Schedule C, you will also be responsible for the standard 15.3% freelancer tax. When working on a W2 contract, the percentage of payment your employer needs to make never appears on your pay stub, but the half of 15% that you are responsible for that covers Social Security and Medicare is already removed. As a freelancer, the IRS considers you to be both the employer and the employee, so you are responsible for the full 15% in this case.

Do I have to file taxes for freelance on a quarterly basis?

Depending on how much you earn via freelance work, you may have to pay quarterly estimated taxes AND file your yearly return by April 15. If you expect to have to pay more than $1,000 in taxes at the end of your income year, you will be required to make quarterly estimated payments, with their own due dates to the IRS. Here are the upcoming quarterly dates for the 2019 tax year (paid in 2020):

Q1: April 15, 2020

Q2: June 17, 2020

Q3: September 16, 2020

Q4: January 15, 2021

The Schedule SE tax form walks you through the calculation of self-employment tax. Take that final dollar figure over to your standard Form 1040. You might also be able to deduct the employer-equivalent portion (50%) of your self-employment tax on your 1040.

W2 and 1099 tax filing
How to file taxes when you have both a W2 and a 1099

Do freelancers get taxed more?

Freelancers are responsible for more in taxes because they are required to pay both the employer and employee tax percentages, which total 15.3% annually. This is because the IRS sees a freelancer as both entities, which is likely because of paperwork flow and making things easier for them to track. They also don’t want to miss out on the extra funds just because someone is self-sufficient enough to not need an employer. Aside from the Self-Employment tax, all over tax rates are the same as a W2. For instance, freelancers pay the same in Social Security and Medicare, it just needs to be paid manually rather than removed from a paycheck every 2 weeks. 

The breaks for freelancers come in the form of available tax credits, and especially tax deductions. Some common deductions available: 

  • A home office – a room dedicated solely for work can be written off based on its size
  • Gas mileage – for client meetings some travel may be required and can be written off as an estimate
  • Supplies – sticky notes, computer equipment, printer ink, and other electronics can qualify

If you are planning on filing both a W2 and 1099 this year, here is some excellent advice from Forbes: “If that’s your situation, you may be able to avoid paying estimated taxes simply by increasing your withholding at your W-2 job(s). For instance, if you normally claim 2 or 1 on your W-4, then reduce it to 1 or 0 to have more taxes taken out of your paycheck, making the quarterly payments unnecessary.”

How much money should I set aside for taxes as a freelancer?

Some of this depends on your ability to use tax credits and tax deductions to lower the amount of income with which you are responsible for, but Dave Ramsey also offers this advice in his blog: “Dave recommends you save as you go by setting aside around 25–30% of every freelance check you receive in a separate savings account to cover the taxes. Why so much? Because you have to pay both income tax and the self-employment tax. What is the self-employment tax? The self-employment tax is 15.3% and solely exists to cover your Social Security and Medicare taxes.”

Dave continues: “At a normal full-time job, your Social Security and Medicare taxes are taken out of your paychecks automatically—and your employer covers half of those taxes. But as a freelancer, you’re considered both an employee and an employer. That’s why the IRS wants you to cover the whole 15.3%.”

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