Depending on the industry, employees and freelancers may seem to do similar work, but their exact roles, their connections with a company, and their tax status are all very different. Naturally, this affects how a person might complete and return his or her taxes. If you’re wondering about the differences between tax forms 1040 and 1099, this primer is for you.
1040 vs. 1099: What the Numbers Mean
The simplest explanation for the numbers 1040 and 1099 being used to refer to employees and freelancers is…taxes.
Form 1040 is the individual income tax form that most professionals are familiar with. Employees and independent contractors alike are required to complete and submit a 1040 tax form every year by the tax deadline.
Form 1099-Misc, on the other hand, refers to the form a person receives when they’ve been paid as a self-employed individual (a.k.a. an independent contractor, consultant, contract-to-hire, etc.), you should receive a 1099 from any client who paid you for your work during the tax year if it was more than $600. Even if you didn’t make over $600 in self-employment income and didn’t receive a 1099-Misc you should still claim your self-employment income.
The employee-equivalent of a 1099- MISC form is a W2. People who work as employees of a company should receive a W2 that shows their annual income, tax withholdings, etc. clearly filled out. Just like 1099 income, income from W2s is reported on the Form 1040.
Employee and Freelancer: What’s the difference?
If you’re not sure of your tax status when it comes to the work you’re doing, it’s important to find out. A company should classify you either as a freelancer or an employee, and send you the corresponding forms when it’s time to do your taxes.
The IRS says the most important factors to consider when deciding if you’re a freelancer or an employee (or when your company is deciding this) are: control and independence. The IRS asks companies to take into consideration these two key components when deciding whether any of their jobs should be classified as employee or freelance jobs.What does that mean for you?
You’re probably a freelancer if…
- You control the choice of what work you do, and how you do your job
- You set your pay rate, bill for completed work, buy your own office supplies, and control other related aspects of your work
- You do not receive benefits like insurance, vacation time, or pensions
- You receive one or more 1099 forms at the start of tax season
You’re probably an employee if…
- Your schedule is more or less set by your employer, and you do work assigned to you by an employer or manager
- Your pay rate is determined by a manager or company, you don’t submit bills for work completed, and your employer/manager provides things like office equipment
- You do receive benefits like insurance, vacation time, or pensions from an employer
- You receive one or more W2 forms at the start of tax season
The Bottom Line: 1040 vs. 1099
If you made any income in the last year, you’ll need to file a Form 1040 with the IRS. And on that form, you’ll include income from any freelance (1099) jobs and employee (W2) jobs you’ve held.
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