Taking the "duh" out of the "W-2 vs. 1099" issue

Many of our clients receive federal 1099-MISC forms each year.  A 1099-MISC form is an offical tax form that annully reports how much income was paid to an independent contractor.  The 1099 form needs to be issued by any party who pays an "unincorporated" person or company $600 or more in any given calendar year.

 

We frequently find ourselves advising our clients about the discipline needed to save for taxes if one receives a 1099.  While you might be giving yourself a high-five when you receive payment for a job or a royalty check in the mail, it's highly important you remember no taxes have been withheld.  You will be taxed on that income at the end of the year. 

 

Those of you who are employees and receive a W-2, your employers are already withholding, on your behalf, Social Security (a.k.a. FICA), Medicare, Federal, State and (if applicable) City taxes.  The total of all of these can easily be 30% or more of your wages. But for you 1099 peeps, the story is different.  When no taxes are being withheld from any income you receive, you must either (a) set aside money for tax time, (b) make quarterly estimated tax payments, or (c) increase the amount of tax withheld from any W-2 wage income you and/or your spouse may be receiving.  As a guide, you should consider saving about a third of your pay for taxes that will be due come next April 15th.   Whether you're required to make estimated tax payments or can simply wait until tax time to pay the government depends on your individual tax circumstances.  Please call us for guidance on these important issues, as they vary from taxpayer to taxpayer.

 

Yes, it's wonderful you just landed a huge gig; however, it's equally important you prepare for the tax due on the income you've just earned.  While you may have more pressing needs for this money, do yourself a favor and set aside some funds for the taxman, 'cause he do cometh!