If you’re new to freelancing, you’ll encounter two main tax forms: 1099 and W-2. Understanding the difference is essential for managing your taxes.
What is a W-2?
A W-2 is the standard form for traditional employees. It reports your annual wages and the taxes withheld from your paycheck.
Key characteristics:
- Employer withholds taxes from each paycheck
- You receive benefits
- Employer pays half of Social Security and Medicare taxes
What is a 1099?
The 1099 form reports income you receive as an independent contractor. If you’re paid $600 or more by a single client, they’ll send you a 1099-NEC form.
Key characteristics:
- You’re responsible for paying all your taxes
- No benefits provided by clients
- You control how, when, and where you work
- Must pay self-employment tax (15.3%)
Tax Implications
The self-employment tax is 15.3% (12.4% Social Security + 2.9% Medicare). However, you can deduct half of this when calculating adjusted gross income.
Can You Have Both?
Absolutely! Many people work as W-2 employees while also freelancing on the side.
Getting Started as a 1099 Contractor
- Set up your business
- Open a business bank account
- Track all income and expenses
- Plan for taxes – Set aside 25-30% of each payment
- Consider quarterly payments
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