How to file W-2 and 1099 together: Tax guide for self-employed and freelance small business owners

Employment is changing. More individuals are opting for being self-employed, freelancing, or solopreneurship. As a result, it’s increasingly common for workers to receive both a Form W-2 for employment and a Form 1099 in the same tax year. Navigating the complexities of filing both a W-2 and 1099 together can be challenging.

Let’s look at how to file 1099 and W2s together, including key points to consider, the differences between these small business tax forms, and guidance on accurately reporting and filing taxes for different income types.

1099 vs. W-2 forms: What’s the difference?

Both a 1099 and W-2 form report income, but they serve different purposes and have different tax consequences. Businesses typically employ two types of workers—employees and independent contractors. 

Form W-2 reports wages for employees, while Form 1099-NEC reports nonemployee compensation. If you pay an independent contractor over $600 during the year, you’ll need to send them a 1099-NEC form. You’ll send employees a W-2 form regardless of the amount of wages, salary, or tips.

Companies don’t withhold payroll taxes for independent contractors. The payments are self-employment income for the contractor. As a result, the contractor is responsible for paying FICA taxes as a self-employed person. 

Note there are other 1099 forms, such as the 1099-MISC, which report different forms of income. The 1099-NEC reports payments of over $600 to contractors, freelancers, and self-employed individuals.  

Form W-2 is for salaried employees or regular workers. It outlines the income the employee received, taxes withheld, and other deductions.

Independent contractors vs. employees

Taxes work differently for Form 1099 vs. W-2 income. In particular, the employer withholds taxes for W-2 wages but not for 1099 workers.

You’re typically an employee if any of these are true:  

• Behavior: The company has the right to control how, when, or where you work. 
• Financial: The company provides tools and equipment. 
• Training: The company provides training and development, such as on-the-job training or workshops. 
• Taxes: The company withholds payroll tax. 
• Benefits: The company provides various benefits and perks like insurance, paid time off, or retirement. 

The tax consequences of each form are generally the biggest distinction. For W-2 employees, taxes are automatically withheld from their paychecks throughout the year, reducing the tax liability when it's time to file.

Employers issuing both Forms 1099 and W-2 in the same year

Small businesses often need to issue both Forms 1099 and W-2 in the same year because they hire independent contractors and employees. So, if you pay employees and contractors in the same year, you’ll likely need to issue both. 

Most individuals receive a W-2 and 1099 form from different employers. Businesses typically do not issue both a Form 1099 and W-2 to the same person. However, there are a few situations where you might need to issue both forms to the same worker. 

Here are some situations when you might need to issue a 1099 and W-2 to the same person: 

• Worker becomes an employee (or vice versa): Say you have an independent contractor that you utilize for part of the year but decide to hire them as an employee. If you paid them over $600 for their independent contractor work, you’ll send them a 1099 plus a W-2 for the wages earned as an employee. Or, if a worker transitions from an employee to an independent contractor for your company during the year, you may need to send them both a 1099 and W-2. 
• Side projects: You may have a worker who performs both employee and independent contractor duties. For example, you have an employee work on a project unrelated to their regular work. Compensation for that nonemployee work shows up on a 1099. 

In both of these scenarios, employers should accurately report both the W-2 income and the 1099 income. This will help avoid any discrepancies or potential audits.

If you find yourself in this situation, a bookkeeping professional may be able to provide guidance on properly reporting both the W-2 and 1099 income.

Employees or contractors receiving a 1099 and W-2 form

On the flip side, some employees or contractors will receive both a Form 1099 and a Form W-2. This happens if you have a job where you are a paid employee but also freelance or do contractor work for another company.

When receiving both a 1099 and a W-2, it's important to consider the different tax implications. For W-2 income, the employer typically withholds taxes. With 1099 income, individuals are responsible for paying their own taxes. There are ways to help make tax time easier if you know you’ll be getting both forms this year: 

Using 1099 income to lower your tax bill

Form W-2 for self-employed individuals does offer advantages when it comes to lowering your tax bill. One advantage of being self-employed is having access to additional tax deductions that can help reduce your taxable income.

Self-employed individuals, including those with a W-2 job, can claim tax deductions for 1099 contractors. You can deduct business expenses, such as home office expenses, phone and internet bills, health insurance premiums, business travel, and business meals. These deductions can lower your taxable income and ultimately decrease the amount of taxes you owe.

Using your W-2 job to lower your quarterly taxes

If you have a mix of income sources, including a W-2 job and freelance work, you can use your W-2 job to help lower your quarterly taxes. One way to do this is by increasing your tax withholdings from your W-2 income through a new Form W-4.

By increasing your tax withholdings from your W-2 job, you can have additional tax withheld from your wages, which can help cover the tax liability generated from your freelance income.

However, note that using your W-2 job to lower your quarterly taxes through increased withholdings may be inaccurate. It's possible to over-withhold or under-withhold, leading to potential tax implications. You may want to consult with a tax advisor to ensure you make the best decision for your individual circumstances.

Filing taxes when you have both a W-2 and 1099

Filing taxes when you have both W-2 and 1099 income can seem daunting, but with a step-by-step approach, you can do it accurately and efficiently: 

1. Report your W-2 income: Begin by gathering your W-2 forms from all your employers. Enter the information from these forms into the appropriate sections of your tax return, such as wages, salaries, and tips. Ensure you enter all the details correctly to avoid any discrepancies.
2. Report your 1099 income and deductions: Next, gather all 1099 forms that show the income you earned as an independent contractor or freelancer. Enter the income you received from each client or source into the relevant section of your tax return. If you had any deductible expenses related to your self-employment work, also include them as deductions to reduce your tax liability.
3. Calculate self-employment tax: As a self-employed individual, you’ll need to pay self-employment tax, which covers both the employer and employee portions of Social Security and Medicare taxes. You can use a self-employment tax calculator for this step. 
4. Include all necessary forms and schedules: In addition to the standard tax forms, you may need to include additional forms and schedules specific to your self-employment income. A common one is Schedule C, which reports business income and expenses. Include all the required forms and schedules to accurately report your income and claim any applicable deductions.

Find peace of mind come tax time

Many workers, such as solopreneurs, are opting to combine both W-2 and 1099 work. As a small business owner, utilizing both can offer benefits, such as gaining access to specialized expertise while keeping overhead low.

However, filing W-2 and 1099s together can be more complex than if you just have one or the other. If you’re struggling with how to file W-2 and 1099s together, look for accounting software that has built-in payroll functions that automate the e-filing process for you. 

To ensure accuracy and maximize your tax benefits, consider consulting with a tax professional who can guide you through the process and help you make the best decisions based on your circumstances.

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