Working two jobs is no longer the exception, as more and more tax returns that include both W-2 and 1099 income are filed each year. A second “side gig” may provide the additional income that allows you to pursue your dream job or pay off debt. Meanwhile, your “day job” is a more regular, standard job for which you receive a W-2. If this sounds like your situation, here is what you need to know when you’re ready to file your tax return.
What is a W-2?
If you work at a salaried or hourly job as a regular employee, you will receive a Form W-2, Wage and Tax Statement. Your employer will send a copy to you and one to the IRS to report your wages and the total tax withheld from those wages.
When do I receive a W-2?
Employers are required to send you your W-2 by January 31st of the year after which you worked for them.
What is a 1099-NEC?
The Form 1099-NEC is the tax form companies will use to report compensation paid to non-employees. This includes contract workers (self-employed) and anyone who is paid for performing work but is not technically an employee. The IRS reintroduced this form in tax year 2020 (for returns filed in 2021). Read more about the Form 1099-NEC.
What is a 1099-MISC?
The 1099-MISC is used to report miscellaneous income. That includes earnings from:
- Crop insurance proceeds
- Excess golden parachute
- Fishing boat proceeds
- Substitute payments in lieu of dividends or interest
- Gross proceeds paid to an attorney
- Section 409A deferrals
- Nonqualified deferred compensation
Before tax year 2020, the 1099-MISC was used to report income earned from contracting or other self-employed work. Now that is reported on a 1099-NEC.
When will I receive my 1099?
Employers are required to send you a 1099 by January 31st of the year after you worked for them. However, unlike a W-2, you don’t need a Form 1099 to file your return. You can report your income from your contract jobs by yourself. This is why it is especially important to keep your own earnings and expenses records. The only 1099 form you need to ask for if you don’t receive it is a 1099-R.
What is the difference between a W-2 employee and a 1099 worker?
An employee receives a W-2 and a contractor receives a 1099. There are three determining factors listed by the IRS to decide whether you are an employee or a contractor.
- Behavioral Control: Does your employer control how you do your job?
- Financial Control: Does your employer pay for the tools needed to perform your job? Do they reimburse your job-related expenses?
- Type of Relationship: Do you have a written contract with your employer? Do you receive benefits? Is your contract longer than one project?
If you answered yes to most of these questions, then you are an employee. If you answered no, then you are a contract worker.
Can I receive a 1099 and a W-2 from the same employer?
Technically yes, you can receive both forms from the same employer. But this is usually rare. For example, if you work a regular 40-hour week under a contract, you would receive a W-2. But if you also performed work that differs from your own job, like cleaning the office on the weekend or being on a committee for a work-related event, then you can receive a 1099 for that extra work. The bottom line is if you, the employee, perform work that would be paid with a 1099 if done by a non-employee, you will be paid with a W-2 for your regular work and a 1099 for your freelance work.
What is the self-employment tax?
The self-employment tax is a tax paid by people who work for themselves. They do not have an employer withholding taxes from their paycheck year-round and are required to pay a lump sum at tax time. The rate is 15.3% which covers Social Security and Medicare. Read more about the self-employment tax.
Did you know…? You can also pay quarterly estimated taxes to decrease the amount of tax you will owe at tax time. Read more about how estimated quarterly payments work here.
Am I required to pay self-employment tax for my side gig?
If you have a side gig and receive a Form 1099, then you are considered self-employed by the IRS and must pay the self-employment tax. Self-employed is an umbrella term that covers many different occupations.
Are you considered self-employed? Here’s how to be sure.
Will having two jobs increase or decrease my refund?
You only get a refund when you are withholding too much income from your paycheck. But when you are self-employed (as in, you receive a 1099), no one is withholding income to pay your tax liability. That’s why self-employed taxpayers usually don’t receive a refund.
If you pay quarterly estimated payments, you can avoid a surprise tax bill when you file your return. If you do have a W-2 job, make sure to check your withholdings to verify that you are receiving the correct amount of income each month. You can even withhold additional income at your W-2 job to cover your self-employed tax liability. Learn how to update your tax withholdings here.
Typically, when you enter your first form of income, your refund is inflated due to the standard deduction being withheld from that amount. When you enter your second income, it reduces your refund because the standard deduction only applies once. But this is not increasing or decreasing your refund.
This article is up to date for tax year 2020 (tax returns filed in 2021).