If you earn money from working, regardless of whether you work as an employee or a self-employed independent contractor, the Internal Revenue Service wants its cut in the form of income taxes. While you must pay taxes on both forms of income, the way your employer reports that income to you, and the way you report that income to the IRS is quite different. You will still need to report both your W2 and 1099 income on your tax return.
If you work for an individual or a company as both an employee and an independent contractor, you'll report your W-2 and 1099 income on Form 1040, after completing Schedule 1 and Schedule C (if needed).
Employee vs. Independent Contractor Status
If you worked as an employee, your employer should provide you with a Form W-2 after the end of the year detailing how much money you were paid in wages, tips and other compensation. Your W-2 will also let you know how much money was withheld for federal, state and local income taxes, Medicare and Social Security. Generally speaking, if your boss can control what you do and how you do it, you are working as an employee.
If you worked as a self-employed independent contractor, and earned more than $600 for the year, your employer should provide you with a Form 1099-MISC detailing how much money you were paid. In most cases, your employer doesn't withhold taxes or pay toward your Social Security or Medicare obligations if you worked as an independent contractor. You are responsible for reporting and paying your own self-employment taxes. If your employer can determine only the result of your work, but not what is done or how it is done, you are probably an independent contractor.
Reporting W-2 and 1099 Income
If you worked for an employer as an employee, but also performed work for the same employer as an independent contractor, you should get both a 1099-MISC and a W-2 in the same year. Report the income from your W-2 on Line 1 of Form 1040, along with any interest, dividend, retirement account or Social Security benefits on lines 2a through 5b.
Report 1099-MISC income on Line 21 of Schedule 1 (1040). For self-employment business profit or loss, complete Schedule C and report your profit or loss on Line 12 of Schedule 1. Add the amounts on Lines 1 through 21 of Schedule 1, and transfer the total to Line 6 of your 1040. You'll notice that Line 6 has a separate field for this non-employee income, which sets it apart from your employee income.
Handling the Tax Complexities
Things can get complex if you believe you worked as an employee but your employer considered you to be an independent contractor. Since an employer is not required to withhold taxes or contribute to your Social Security or Medicare obligation if you are a self-employed independent contractor, you'll be responsible for paying your self-employment taxes. You are also eligible to directly deduct a greater number of business expenses than you would if you worked as an employee.
If you believe you worked as an employee, but received a Form 1099-MISC, you should contact your employer. This is a different situation than filing taxes using a W-2 and 1099 together. If you can't resolve the issue, you can ask the IRS for help by submitting a Form SS-8, "Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding."
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.