First, the standard legal disclaimer! Taxes are very complicated (thank you Congress!) and very unique. What you have to pay and when is based on your own unique situation. Make sure you do your own research, or use a good online Tax preparing system like TurboTax, or use a tax preparing company like H&R Block. DO NOT depend on the information below to make tax decisions.
Depending on what type of employee you are you will need to file your taxes either every quarter (Contractor) or once a year (Employee). If you’re a contractor and earn less than $1000 a year then you can wait till the end of the year to file.
What’s a Contractor vs an Employee
From a perspective of your pay stub and taxes, there are several key differences. If you are an employee your employer pays 50% of your social security and Medicare taxes, and holds and pays your state and federal income taxes from your paycheck. As a contractor you are responsible for paying all of those taxes yourself. The table below gives an overview.
| Employee | Contractor | |
| Tax Form from Employer | W2 | 1099-MISC |
| How Often Paid | Every pay period – usually once every 2 weeks | Paid when contractor invoices employer |
| Health Benefits | Sometimes | No |
| Pays Income Tax? | Employer | Contractor |
| Pays Social Sec and Medicare? | 50/50 | Contractor |
How Much Am I Really Earning?
Based on the information in the section above, you can see that if a Contractor and an Employee both get paid $15 an hour, that the contractor will end up taking more money home every paycheck (because taxes have not been withheld), but will end with less money at the end of each quarter (because they have to pay their own social security and medicare taxes). So, if you are a contractor, generally speaking your hourly wage is higher than for an employee doing the same job, to compensate for this. There are many online calculators to help you calculate a ballpark idea of how much money you will end up with after paying all your taxes.
W2 vs 1099 Form: Whats on There
A W2 generally has your name, address, social security number, information about your employer, your wages for the year as well as any benefits paid to you (like health care) and all the taxes that your employer withheld from your pay check and paid on your behalf (state and federal income taxes, social security and medicare taxes, etc). A good overview of your W2 form can be found here: https://www.forbes.com/sites/kellyphillipserb/2014/02/11/understanding-your-tax-forms-the-w-2/#137fa68523ac
A 1099-MISC is what is used to report earnings to a Contractor. It will have most of the same information as the W2, such as your employers name and address, and your name and address and SSN. It will also have the total income paid to you, but will not list taxes withheld, as those are your responsibility.
What’s on Your Paycheck
When you get paid as an Employee, your paycheck will list your gross pay (total before any taxes have been removed) for the pay period as well as your total gross pay so far for the year. It will also list all the taxes that were withheld for this pay period from your gross pay. And finally it will show your Net pay (gross pay minus all taxes taken out) for this pay period.
When you get paid as a contractor you will usually just get a check. At the end of each quarter you will get a 1099-MISC from your employer listing your gross pay. You are then responsible for filing and paying your taxes each quarter.
Filing Taxes (1040 and 1040-ES)
As an employee you need to file your taxes every year, using Form 1040. Taxes are due April 15th, meaning they must be filed and any additional taxes paid by this date. You use Form 1040 to file your taxes.
As a contractor you need to file your taxes every 3 months, or every quarter, using Form 1040-ES. Due dates are April 15th, June 15th, September 15th and January 15th. You use Form 1040-ES to file your taxes every quarter and then Form 1040 by April 15th to file your annual taxes at the end of the year.
- Form 1040 (https://www.irs.gov/pub/irs-pdf/f1040.pdf) is used by employees and contractors to file their taxes.
- Form 1040-ES (https://www.irs.gov/pub/irs-pdf/f1040es.pdf) is used by contractors to file quarterly tax estimates.