W-2 Vs. 1099
“No receipt, no deduction with the IRS.”
Angela Sticca Snyder (01:17-01:20)
Many people may wonder what all those crazy numbers on top of their tax forms mean. Well, wonder no longer, there is actually a quite simple definition of what they all mean. Two of the most familiar form numbers are W2 and 1099. There’s a difference between a 1099 and a W2. Most people get W2’s. W2 is when you’re an employee and you’re working for someone else, and they’re withholding taxes for you. It’s the most common way of getting paid. If you receive a 1099 on the other hand is when you’re doing side work, maybe a gig or some extra work for somebody, or you have your own business and your customers then give you a 1099, that income is not taxed before you receive it. So, when you get your income, it comes to you in a gross format. With that, then you get to write off deductions that go against that income. In this week’s episode, Angela Sticca Snyder talks about W2 vs. 1099.
Part One of ‘W2 vs. 1099’
When you are an independent contractor you are able to deduct your expenses against your gross income. But for those people it is imperative for them to save their financial documentation. Credit card statements will not support you in an audit. What you need to have is a receipt that shows what was purchased. So, if you go to a store and they hand you that receipt, you need to make sure you take a picture of it to save it. There are many different apps that can help with saving receipts, so you do not have to worry about keeping the hard copies. Keep receipts If you buy something online, set up a folder on your computer that’s called invoices or receipts. You could even set up a dummy email where you send all our receipts. You want to make sure you have a copy of every item on your tax return whether it be on a phone, email, or hard copy.
“It’s important to make sure that you report all of your income.” – Angela Sticca Snyder (04:42-04:47)
Now that you’re using a 1099 form, you want to make sure that you’re keeping track of all expenses involved and carrying out your duties of whatever function you’re doing to earn that money. If you’re driving for business purposes, then you need to make sure you have a mileage tracking app. That’s the second thing that’s most important. When you get your 1099 form, there’s a lot of good free apps out there. You can turn it on, and it just runs in the background. Technically and legally, you are supposed to have the starting and stopping odometer reading. Also keep track of where you went, who you went to see, and the business purpose. Keep your mileage tracked and use an electronic calendar that’s got your appointments.
Part Two of ‘W2 vs. 1099’
Now if you’re audited, you have a backup. If you’re organized, do it now. Many business owners have more time to spend on making money than keeping track of this. As long as you’ve got outstanding support, you’ll be fine. With a 1099 form, even if you’re a sole proprietor or an LLC, you still report your income and expenses on a schedule C small business form.
It gets filed with your 1040 tax return if you report your gross income. which would be all of the income you received before any expenses. It is crucial that the total gross income on your schedule C at least equals or exceeds the sum of all your 1099. If you have 1099 that’s greater than what you’re reporting as income, you will automatically receive a notice from the IRS. They have a matching system. If they mismatch and your income reported is last, you’ll get a notice.
“Anything that you incur in order to operate your business is deductible.” – Angela Sticca Snyder (4:56-05:02)
Once you reported all of your income on schedule C, there are lots of deductions that you can take. Anything that you incur to operate your business is deductible. For instance, things like advertising, marketing, promotion, and anything you’re doing to get your name out there. This also includes pins, business cards, or flyers, all that kind of stuff that you are expanding to get people to notice you.
Other expenses that you can incur would be retirement plans. You can set aside money for yourself in retirement: any office expenses or office supplies, your cell phone use, and even your home office. The home office is not the risk it used to be. So, for instance, if you do work out of your house and you have a home office, but you’re conservative, or you’re unsure, then take the standard home office because you can take that, and it doesn’t require any supporting items. Again, the difference between the W2, which is when you’re truly an employee and 1099, is that your social security and medicare taxes come out of the W2, and the employer also pays their half. When you get 1099, you report your gross income; you have deductions to come out of your net income, but remember there are no taxes withheld from your 1099.
Since you are considered self-employed, you’re both the employee and the employer, so you then pay the self-employment tax, which is 7.65% times two, which is 15.3, so when you’re a W2, you pay 7.65, and your boss pays 7.65. When you’re self-employed, as a 1099 contractor, you are responsible for both sides.
It is possible to have no income tax but have self-employment tax. When you are self-employed, you will always have a balance due on your tax return. If you don’t make an estimated tax payment, there will always be tax due when you are self-employed and have any profit because that 15.3% goes automatically on the net profit from your schedule C, which is where you can report your 1099 income.
How to Get Involved
Taxanista is a leading certified public accountant who offers reliable professional tax and accounting services. She is a consummate strategist. She loves listening, analyzing and developing strategic plans. Do you have bigger issues? Taxanista can help you fight off the IRS. Angela knows how unsettling some of your struggles may be that’s why she offers private consultations for your business and tax matters. Increase your profit by knowing your numbers. Reach out to her now. https://www.taxanista.com/