How to File Taxes When You Have Both 1099 and W-2 Income

By Carrie Smith

3 min read

According to a study by the Freelancers Union, over 53% of the U.S. workforce is involved in some kind of freelance work. And that number is expected to grow in the future.

This means that many independent contractors freelance part-time in addition to having a full-time job. If you’re one of them, you’ll receive income documents for both 1099-MISC and W-2 income at the end of the year. But how does this affect your taxes?

Here’s what to expect when you have both 1099 and W-2 income, and how to simplify your tax situation.

The Differences Between a 1099 and a W-2

First, it’s important to distinguish between a 1099-MISC and W-2. A Form 1099-MISC is the tax form you receive from a company you contracted with. A W-2 is the tax form you receive as an employee from your employer.

The major difference between these forms is the tax section. Companies do not withhold taxes for contractors, so the 1099 will include the full amount that was paid for you. On the other hand, companies withhold taxes on W-2 income for their employees; a W-2 will include your total earnings, plus how much was already withheld in taxes and sent to the government on your behalf.

How Does This Affect My Taxes?

Everyone pays roughly 15% of their income to the government to cover Social Security and Medicare taxes. As an employee, you pay about 7.5% and your employer pays the other 7.5%. As a contractor, however, you pay the full 15% (nicknamed “self-employment or SE tax”).

That means, as a contractor, you pay 7.5% more in taxes than an employee does. However, the tradeoff for this is more flexibility, autonomy and control in the work you do. Additionally, you get more leniency in the expenses you can write off, meaning that you pay 15% tax of a much lower number than most employees do. For example, employees can’t write off commuting costs, but you can as a contractor if you’re commuting to visit a client.

Your self-employment tax is only based on your 1099 earnings. However, your income tax is based on both your 1099 and W-2 earnings, so having both types may increase your income tax bracket.

How Do I Pay Taxes on My 1099 Income If I Have Both Types?

There are three ways to pay taxes on your 1099 income:

1. Pay taxes quarterly: The first method is to pay the government estimated taxes every quarter.

2. Withhold more from your W-2 income: The second method is to ask your employer for a new Form W-4. You filled out a Form W-4 when you first started working for your employer; it helps them figure out how much they should be withholding in taxes for you. You can ask them to withhold more for you from each employee paycheck you receive. Talk to your HR department to have them help you out.

The upside to this is convenience, since you don’t have to remember to pay quarterly taxes yourself. The downside is that it isn’t very accurate, so they may over-withhold taxes (meaning they’re not paying you enough) or under-withhold taxes (meaning you may get hit with a penalty at the end of the year on the underpaid amount).

3. Pay a penalty at the end of the year: If you don’t pay quarterly taxes or change your W-4 to have more withheld, you may be forced to pay a 6% to 8% penalty fee on the amount you underpaid when you submit your final taxes on April 15. So if you made $10,000 and owed $2,000 in taxes, your penalty might be around $120.

Conclusion

Now that you understand the difference between income earned as a freelance contractor and an employee, take steps to set yourself up for a smooth tax season.

No one wants to pay more taxes or fees to the IRS than absolutely necessary, so make a decision to pay quarterly taxes or withhold enough from your regular paycheck to cover any additional taxes. It may not be a fun process, but your bank account will thank you at the end of the year when you can keep more of your hard-earned money. For more money-saving tips for this tax season, see our guides to taxes for the self-employed and tax basics for on-demand workers.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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