There are several situations where an employer or independent contractor may have to deal with both a 1099 and Form W2 in the same year. This can result in questions for both the employer and the employee/contractor.
Fortunately, the IRS rules regarding a 1099 and Form W-2 in the same year are clear and easy to follow. We'll go over how to file your freelancer taxes along with employee income. First, it is important to identify when you receive each form. Second, it is important to identify how this impacts self-employment tax obligations.
Note: if you would like a tax software to help you organize your business expenses and file your freelancer wages, then try Bonsai Tax. Our app will send you filing reminders, estimate your taxes, and help you track all your freelance tax deductions. Users who try our software save an average of $5,600. Claim your 14-day free trial today.
As an employer (this includes independent contractors that hire employees and/or sub-contractors) there are two scenarios in which this could potentially be an issue.
This is the most likely scenario most employers will face. They will need to issue form 1099s and W2s for the tax season but no one receives more than one tax form. For the sake of simplicity, anyone receiving a W2 has had the employer portion of payroll taxes paid by the employer.
The employee portion of payroll taxes has also been withheld (based on the employee withholding direction).
A trickier situation for employers is when they want to issue a form 1099-NEC and Form W-2 to a single person. There are three factors to consider if you are faced with this situation as per the IRS guidelines.
It is not uncommon for IRS examiners to review this situation. The linchpin of the examination is determining if the worker should have been treated as an employee for the period they were treated as self-employed.
If you receive Form 1099-NECs and Form W-2 wages there is one question to answer before getting into the tax implications. The question is whether you should really be receiving a form 1099-NEC.
If you are classified as a 1099 contractor then you are responsible for all the self-employment tax responsibilities (Social Security and Medicare). If you are looking at prior-year tax situations, it would be a 1099-MISC instead of a 1099-NEC. That change for independent contractors was made for the 2020 tax year.
The reason it is important to consider your employment status is it will have a significant impact on your net income. As a W2 employee, the employer pays a portion of the payroll taxes (Medicare and social security).
As a self-employed person, you are responsible for both the employer and employee side of those taxes which effectively doubles the amount of taxes you pay - excluding your self-employment income tax responsibility.
The first step of filing your employment taxes correctly is understanding the Form W2 and Form 1099-NEC. These forms provide similar, but not identical, information.
The 1099-NEC is the informational form provided by "employers" to self-employed independent contractors. It indicates the total amount paid to the contractor. Employers will issue this form because it helps justify their expenses which reduces their taxable income.
It serves as evidence that additional income has been paid to an individual taxpayer. You will likely receive this income as an independent contractor or as a self-employed individual in a sole proprietorship or single-person limited liability company.
If you own your business or if you're a freelancer, you'll likely receive a 1099-NEC form for each project that you complete. If an "employer" has sent you $600 or more for that year, they are legally required to provide you with a 1099-NEC. Taxes will not be deducted from your payments, except in specific circumstances, so the 1099-NEC is essential for accurate tax reporting.
A W2 form is an Internal Revenue Form that is used to report income. It is used to both report wages paid to an employee and the taxes that were withheld from them.
It also indicates the amount of taxes paid by the employer. Depending on the benefits provided by the employer, it also includes a variety of potential deduction codes.
Similar to Form 1099 any employer who paid you $600 or more during a given year, is required to send you a W2 for that year. Form W2 is provided to what most people refer to as "traditional employees".
Before we get into how to file a 1099-NEC and W2 in the same year, let's first clearly define freelancers and employees.
The default position of the IRS is that a worker is an employee unless there is evidence to the contrary. This is largely because the required tax withholding from an employee's paycheck is the primary way the IRS enforces the collection of income taxes from individuals and payroll taxes from employers.
To be considered a freelancer there is a certain set of criteria that must be met based on evidential facts. The keys are to look at the entire relationship and consider the extent of the right to direct and control the worker. They all relate to the amount of independence a freelancer has.
Facts that provide evidence of the degree of control and independence fall into three categories:
There are two situations in which an independent contractor can receive both Forms 1099 and W2 from the same employer. The first is if the worker performed duties as an employee and independent contractor or freelancer concurrently for the same employer.
This situation tends to arise when employees to work or provide services outside of their normal job description. For example, if you are employee and your employer says they will pay you $1,000 to design a website outside of your normal working hours. The $1,000 payment would require a 1099-NEC.
The other situation is where the worker held these two jobs at separate times during the same tax year for the same employer. From an employee/contractor perspective, the key is making sure the amounts on each tax form are accurate.
If you are switching from contractor to employee then you should complete a W4 and the employer must treat you like any other new employee. Converting an employee to an independent contractor requires firing the employee and then having them fill out a W9.
If you switch roles for the same company, clear distinctions must remain to uphold either the employee or independent contractor categorization.
Here are some frequently asked questions to file form 1099-NEC for non-employee compensation on top of your W-2 income.
If you have both W-2 income and 1099 income to report on your annual tax return there are some variables to consider but it doesn't need to be overly complicated.
The first step is filling out your tax return with your W-2 information - just like you would if you only have W-2 income. Your W-2 tells the IRS how much you earned from your and how much you have already paid in taxes throughout the year. This is important because when you receive W-2 income, your employer is paying half of the Medicare and Social Security payroll taxes.
Once your W-2 information has been entered, you will enter your 1099 income. This is often referred to as your self-employment income. Since your worker classification for 1099 income is as an independent contractor/self-employed individual you will be responsible for both sides of the payroll tax equation. Once your income has been input into your annual tax return you will add in any applicable deductions.
You can always file a 1099 extension before the deadline if you need more time.
The short answer is - No. Annual tax returns are designed to provide a holistic picture of your tax profile. This means that, at the end of the day, it doesn't matter what your income sources are or what tax deductions are - the goal is for the IRS to get the full picture the amount of income you earn and allowable deductions/expenses since these two variables determine the amount of taxes you must pay.
Note: Freelancers with business expenses can lower their taxable income substantially if they provide the IRS with proper records. A tax software like Bonsai Tax can help with that. Our app scans your bank/credit card expenses to discover potential tax write-offs automatically. Users generally save $5,600 from their tax bill. Claim your 14-day free trial here.
Taxes are "paid" as you earn or receive income. The IRS accomplished this in two way: payroll withholdings and estimated quarterly tax payments. Estimated taxes can be used to pay self-employment tax and the alternative minimum tax in addition to income taxes. If you do not pay enough in estimated taxes then a penalty will be due when you file your annual tax return.
Individuals, including sole proprietors or freelancers, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.
You don’t have to pay estimated tax for the current year if you meet all three of the following conditions.
If you have both W-2 and non-employee income, you'll need to file IRS form 1040. Typically, as an independent contractor, you'll need to file Form 1040-A or 1040-EZ. You'll be able to deduct one-half of the self-employment tax on your Form 1040 or personal tax return.
If you receive both W-2 and 1099 income you can increase your W-2 withholdings to cover all of your tax obligations. Quarterly estimated taxes are typically paid to cover any estimated unpaid taxes but it is not a requirement. The requirement is simply to pay taxes as your earn income.
Instead of filing quarterly tax payments, you can cover this obligation by adjusting how much is withheld from your paycheck. It is important to keep in mind that while this is an option, it does require some calculated tax estimates to ensure you withhold enough from your W-2 wages.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?