With Super Bowl Sunday, Mardi Gras, and Valentine’s Day finished, the holiday season is well and truly over. It’s time to get back to the grind, represented by the sometimes frantic, often less-celebratory Tax Day: April 15.
So, pack away the team banners, sparkly beads, and heart-shaped cards. The W-2 is arriving (or the 1099 or 1098, depending on your source of income). But don’t worry, we’re here to guide you through it. (And don’t forget we still have St. Patrick’s Day coming up on March 17, to celebrate another type of green.)
W-2 vs. 1099
While a W-2 and a 1099 are two very different IRS tax forms, they basically do the same thing: Both forms show how much money you’ve earned for work you’ve done during the year.
Those who work a salaried or hourly job as a regular employee receive a W-2, an employee’s wage and tax statement. The W-2 is a record of an employee’s compensation and benefits, stating the amount of taxes withheld for the year. A W-2 must be filed for all regularly employed workers paid at least $600 per year if taxes are withheld.
A 1099 applies to non-employees such as independent contractors, freelancers, sole proprietors, or gig workers. It lists all compensation paid to a worker in a given tax year, plus any federal, state, and local taxes that were withheld (or none, if no amount was withheld). This includes any worker paid for performing work but not technically an employee. Any client who paid such a worker over $600 in a year is expected to send them 1099.
W-2 income will be taxed differently than 1099 income in a couple of important ways.
The first concerns the FICA (Federal Insurance Contributions Act) tax. FICA is a U.S. federal payroll tax deducted from each paycheck. Your nine-digit number helps Social Security accurately record your covered wages or self-employment. As workers (including the self-employed) pay FICA taxes, they earn credits for Social Security benefits. But a W-2 employee only pays 7.65% of the FICA tax out of pocket. The employer is responsible for the other 7.65%.
For a 1099 worker, there are no income taxes withheld from the paycheck, so a 1099 worker is responsible for calculating and paying the full tax liability when filing a tax return.
Paying Taxes With a 1099
There are several different types of 1099 tax forms. Use 1099 to determine how much income was received during the year and what kind of income it was.
1099-A Canceled mortgage, foreclosure or short sale
1099-B Sale of stock or other securities
1099-C Cancellation of $600 or more of Debt
1099-Div Income from Dividends and Distributions
1099-G Payments from federal, state, or local governments including local tax refunds, unemployment compensation.
1099 INT Interest Income. If you earned $10 or more in interest from a bank, brokerage, or other financial institution, you’ll receive a 1099-INT.
1099-LTC Long-term Care and Accelerated Death Benefits
1099-Misc Miscellaneous Income
1099-NEC Nonemployee Compensation
1099-Q Payments from 529 plans or other Qualified Education Programs. Keep in mind, however, that the earnings in a 529 plan are generally not subject to tax when they’re used for qualified education expenses, so for many people, the 1099-Q is just record-keeping.
1099-R Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, or IRA’s. Many retirement plans are tax-advantaged, so this form might be simple record-keeping on behalf of the IRS.
1099-S Proceeds from Real Estate Transactions. The proceeds from the sale of your house or other real estate aren’t necessarily taxable.
1099-SA Distributions from Health Savings Accounts or Medicare Advantage Medical Savings Accounts
Taxpayers must report any income even if they did not receive their 1009 form. However, taxpayers do not need to send the 1099 form to the IRS when they file their taxes. In other words, the IRS receives the 1099, containing the taxpayer’s Social Security number, from the issuer or payer.
About That 1098 …
The 1098 form and its variants are used to report certain contributions and other possible tax-deductible expenses to the IRS and taxpayers. In particular, the 1098 form covers mortgage-interest payments; contributions of motor vehicles, boats, or airplanes; student loan interest paid; and tuition and scholarship information.
1098 Mortgage Interest Statement is an IRS form used by taxpayers to report the amount of interest and related expenses paid on a mortgage during the tax year when the amount totals $600 or more. Related expenses include points paid on the purchase of the property.
1098-E Student Loan Interest Statement reports student loan interest received from you by a lender throughout the year. Lenders are required to fill out this form if you paid them $600 or more in interest over the year. This interest may be deductible as an adjustment when calculating your Adjusted Gross Income (AGI).
1098-T Tuition Statement reports payments received for qualified tuition and related expenses, certain adjustments, and scholarship or grant amounts for the prior year. This information may be used on your tax return to claim related education deductions and credits. Scholarships or grants may reduce the amount that qualifies for the credits.
Conclusion: A To-Do List
There are a number of things you can do while you wait for the forms to arrive.
- Make a list of 1099s and 1098s you expect to get.
- Watch out for corrected forms.
- Keep your address current.
- Check your online portal. The digital copy may be available before you receive it in your mailbox.
Seek tax help if you have questions about your non-employment income or how to report that income properly to the IRS.
Whether you receive the 1099 or not, you still need to report all your income.
Make sure you receive and report all your 1098s, as they are deductions, especially if you don’t take the standard deductions.
As always, seek tax help if you’re a taxpayer with questions about your non-employment income or how to report that income properly to the IRS.
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