There’s no doubt about it – filing your taxes when you have both W-2 income and 1099-MISC income means more work and some extra tax forms. The rules for each are somewhat complicated, but a little understanding of why you’re filing these forms can make the whole situation clearer.
If you are generating income as a freelance worker, you are probably quite familiar with IRS Form 1099. In addition to a W-2 and 1099-MISC, many individuals must also incorporate Schedule C of Form 1040 and Schedule SE into their tax filing paperwork. These documents cover business profit / loss and self-employment tax, respectively.
Understanding 1099 and W-2 Income
Your W-2 form reports how much you were paid as an employee. Your employer conveniently withheld taxes from those earnings and sent the money to the government on your behalf. The total of all your W-2 income goes on line 7 of the Form 1040 tax return.
This form shows income you received as a self-employed taxpayer. You were not actually employed by the individual or company who paid you this money; you performed services as an independent contractor. Payers are required by law to issue 1099-MISC forms whenever they make cumulative payments of $600 or more to any taxpayer during the year. The form is not issued per payment, but for the total amount remitted to you. The IRS gets a copy of the form, too.
Schedule C is your friend if you have 1099-MISC income. This is the Profit or Loss from Business form. First enter the total of all your 1099 income on the form, including any self-employment income for which you did not receive a Form 1099.
Now you get to deduct your costs of doing business: expenses like advertising, a home office you might maintain, supplies and equipment. All this is deducted from your gross income to arrive at your taxable income. If you have more expenses than income, you have a business loss. The amount you arrive at when you’ve completed Schedule C goes on line 12 of your Form 1040 tax return.
You can file Schedule C-EZ instead, which is shorter and easier, if your business expenses are $5,000 or less. If you want to claim a home office, you’ll have to complete and submit an additional document with Schedule C, Form 8829.
Identifying Key Distinctions and Differences
The big difference between W-2 income and 1099-MISC income is that your employer has already withheld taxes from the earnings that appear on your W-2. Now you have to take an extra step to calculate taxes due on your 1099 freelance work, and this means completing Schedule SE - Self-Employment Tax.
Schedule SE calculates what you owe in Medicare and Social Security taxes on your self-employment income. You only paid half of these on your W-2 income, and your employer matched the other half. But you are your employer if you're also self-employed, so you have to pay both halves of this income. This means completing and filing Schedule SE. The resulting total, called the self-employment tax, goes on line 57 of your 1040 tax return.
You can also complete Schedule A if you wanted to itemize deductions on your tax return rather than claim the standard deduction for your filing status. This might be worth considering through tax year 2017 because you can deduct work-related expenses for which your employer did not reimburse you when they exceed 2 percent of your adjusted gross income. If these expenses, plus all your other deductible expenses, exceed the amount of your standard deduction, you’d be better off itemizing than claiming the standard deduction. It’s an either/or decision – you can’t do both.
Exceptions to 1099 Requirements
If someone paid you less than $600, this doesn’t mean the money’s not taxable. It just means that the company didn’t have to send you a 1099 for it. You still must report and pay applicable taxes on income you didn't get a 1099 for.
Changes for Tax Year 2018
The Tax Cuts and Jobs Act that took effect in January 2018 eliminates the employee expense deduction for work-related expenses for tax years 2018 through 2025 for people who are not self-employed. This doesn’t mean you can’t still itemize if you want to. You just can’t claim a tax break for these particular expenses. If you're paying taxes on 1099 income, you still can deduct these expenses using Schedule C.
There is also a new 20 percent deduction available for self-employed people and owners of many partnerships and S corporations who pay taxes on their income through their own tax returns rather than a separate business tax return. That type of income is known as passthrough income, since it passes through to your own tax return. It's worth investigating this tax deduction if you have 1099 income.
Tax Law in 2017
The passthrough tax deduction is not available in tax year 2017. On the other hand, if you have W-2 income, you can claim unreimbursed business expenses in excess of 2 percent of your adjusted gross income as a tax deduction.
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- Freelance Taxation: What Should Freelancers Do With Both W-2 and 1099 Income and Expenses?
- IRS: Schedule SE
- IRS: Instructions for Schedule C
- IRS: Instructions for Schedule A
- IRS: Form 1040
- CNBC: New Tax Law Takes a Hatchet to These Worker Expenses
- Nolo: The 20% Pass-Through Tax Deduction for Business Owners
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Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.