What are the Differences Between W2 and 1099-NEC?

Should I get W-2 or 1099-NEC?

What is the difference between W2 and 1099-NEC?

Many freelancers would have been confusing these questions when you are in a contract with a company.

Or, many of you may just leave your full time job and become a freelancer.

Before you work with your client, you may want to clarify what the differences between this two forms are?

Basically, W-2 form is for employee. 1099-NEC form is for self-employed. And these two groups conduct different tax obligations.

I will also share more differences below.

1099-NEC

What is 1099-NEC?

NEC represents Nonemployee Compensation.

Nonemployee, apparently means you are not an employee. In other way, you are independent contractor or self-employed.

In this form will show all the compensation you have received in the year from this company without any payroll tax withholding.

Who Will Get 1099-NEC?

Independent contractors, gig workers, freelancers, sole proprietors, and self-employed individuals.

Who is 1099 Self Employed?

1099-NEC Self-employed is an independent contractor of a company.

Independent contractors, apparently, is independent of the employer.

1. You are outsourced and by case.
2. 企業主是你的顧客, 非雇主。
3. You guys sign a long-term or short-term contract.
4. You control the time, as long as you finish the project before the due date.
5. You don’t earn fix amount of compensation. The more service you provide, the more you get paid.
6. You do not have minimum wage, you decide how much you get paid yourself.
7. You don’t have any additional benefits such health insurance, pension, paid time off etc. which W2 employees enjoy.
8. You have your own rules. You do not follow the rules the owner makes.
9. You prepare your own work tools for the work.

How are 1099-NEC Self-Employed Taxed?

自雇者在年底收到1099-NEC表格時，要在個人稅表1040中的Schedule C ( Profit & Loss) 進行申報。

Besides income tax, 1099-NEC Self-Employed also pay the full self-employment tax. 1/2 self-employment tax can be tax deductible.

What Tax Deductions do 1099-NEC Self-Employed Enjoy?

Besides choose the more of Standard Deduction and Itemized Deductions, 1099 holders are allowed to deduct all their business-related expenses on Schedule C.

If you work at home, you also enjoy Home office Deductions. Part of your home office expenses such as utilities, internet etc. can be tax deductible.

Also Read: Home Office Expenses Tax Deduction: Am I Qualified?

W-2

What is W2?

W-2 Form is also called Wage and Tax Statement.

As an employee, you use w-2 to report your earned income on the form 1040 individual tax return to the IRS.

It shows all your annual earning status from a company including:

• Your annual gross income

• Federal and State Income Tax Withholding
  Your employer will withhold federal and state income tax for you in every paycheck. It is the total tax amount your employer has been withholding for you as of the end of the year.

• FICA (Payroll Tax) : Social Security Tax and Medicare Tax

• Any retirement plan such as 401 K or simple IRA Etc if applicable.

Who Will Get W2?

If you are a full time or part time employee, you will get W-2 at the end of the year.

Who is W2 employee?

Basically, employees have a kind of inseparable relationship with the employer.

There are some features of employees:

1. You are in house.
2. The owner is your employer.
3. You contribute most of your time in the office.
4. You have fixed salary regardless how many works your employer assign to you.
5. You not only earn the salary but also earn other benefits such as pension, health insurance, paid time off etc.
6. You follow every rules the employer makes.
7. Employer offer you all the work tool for you to finish you work such laptops, software etc.
8. 雇主會替你上繳自雇稅和預估所得稅。

How are W2 Employees Taxed ?

除了個人所得稅，員工必須自己負擔其中50%的社會安全稅以及醫療稅（自雇稅）。

What Tax Deductions do W2 Employees Enjoy?

Use the more of:

1. Standard Deductions
2. Itemized Deductions

Itemized deductions includes medical expenses, property tax, donation and mortgage interests.

W-2員工不像自由工作者，除了上述的抵扣項目，沒有其他費用可以抵扣。

What is the difference between W-2 and 1099-NEC?

	W-2	1099-NEC
Who	Employee	Self-Employed
Employment	In House	By Case
Personal Brand	No	Yes
Time	Tight to the employer	Flexible
The owner is your	Employer	Client
Fix Salary	Yes	No
Work Result Control	No	Yes
Benefits Packages	Yes	No
Self-Employment Tax	50%	100%
Payroll Tax Withholding	Yes	No
Business Tax Deductions	No	Yes

Should I get W-2 Form or 1099? Which One is Better?

I would say there is nothing about which one is better.

People would say:

” the employer will take 50% responsibility of social security and medicare tax for me. I also enjoy the pension plan and health insurance “

” The pros to be an employee are more than that of self-employed. “

In fact, I would say self-employed enjoy more tax benefits than employees do.

Although the W-2 employees only pay half of the social security and medicare tax, you are not allowed deduct any expenses, even though you work at home.

Comparatively, although 1099 Freelancers have to pay the full self-employment tax, they can take most of their business related costs and expenses as tax deductible expenses, including the health insurance.