Lesson 2 of 3 · 2 minute read
W-2 or 1099: how you're paid changes your taxes
Employees and gig workers are taxed differently. Here's what to know.
How you get paid decides how your taxes work.
Employees: W-2
If you’re an employee, your employer takes taxes out of each paycheck and sends them to the government. That’s called WithholdingTax your employer takes out of each paycheck and sends to the government for you.More in the glossary. After the year ends, your employer sends you a W-2 formA form from your employer that shows what you earned last year and how much tax was taken out. You use it to file your taxes.More in the glossary showing what you earned and what was taken out. Employers have to send it by January 31.
When you start a job, you fill out a W-4 form. It tells your employer how much federal tax to take out. You can change it anytime, for example after you have a baby.
Contractors and gig workers: 1099
If you drive, deliver, or freelance, you’re usually a contractor, not an employee. No taxes are taken out of your pay. You may get a 1099 formA form that shows money you were paid as a contractor or gig worker, or other income like interest. Usually no tax was taken out.More in the glossary showing what you were paid.
You still owe taxes on that money, including Self-employment taxSocial Security and Medicare tax for people who work for themselves, like gig workers. It's about 15% of your earnings after expenses.More in the glossary for Social Security and Medicare. That’s about 15% of your earnings after expenses, on top of any income tax.
What to do if you’re paid on a 1099
- Save part of every payment in a separate account for taxes.
- Keep track of your expenses, like mileage, phone, and supplies. They lower the income you pay tax on.
- Keep records of what you earn, even if you don’t get a 1099.
The gig work tax set-aside tool can help you pick an amount to save.
How you get paid changes how your taxes work.
If you are an employee, your boss takes taxes out of each paycheck. After the year ends, you get a W-2 formA form from your employer that shows what you earned last year and how much tax was taken out. You use it to file your taxes.More in the glossary that shows what you earned and what was taken out.
Gig workers and contractors usually get a 1099 formA form that shows money you were paid as a contractor or gig worker, or other income like interest. Usually no tax was taken out.More in the glossary. No taxes are taken out of their pay. But they still owe taxes.
This includes Self-employment taxSocial Security and Medicare tax for people who work for themselves, like gig workers. It's about 15% of your earnings after expenses.More in the glossary. It is about 15% of what you earn after expenses, plus any income tax.
If you are paid on a 1099, save part of every payment for taxes. Keep track of your costs, like mileage and phone. They lower the income you pay tax on.