Difference between w2 and 1099

[VolvoGirl · Accepted solution]

W2 is for employees and have taxes withheld on them and they take out FICA (SS&Medicare).  You deduct unreimbursed job expenses on schedule A Itemized Deductions subject to a 2% floor.

1099Misc is for self employment freelance sole proprietor independent contractor, etc. income.  No taxes are taken out and you pay both the employer and employee portions of FICA tax as self employment tax.  You can deduct all your expenses.  You fill out schedule C for Business Income.

Self Employment tax (Scheduled SE) is generated if a person has $400 or more of net profit from self-employment on Schedule C.  You pay 15.3% SE tax on 92.35% of your Net Profit greater than $400.  The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare.  So you get social security credit for it when you retire.  You do get to take off the 50% ER portion of the SE tax as an adjustment on line 27 of the 1040.  The SE tax is already included in your tax due or reduced your refund.  It is on the 1040 line 57.  The SE tax is in addition to your regular income tax on the net profit. You will still owe the SE tax even if your taxable income is reduced to zero (by exemptions and deductions) and you don't owe any regular income tax on it.

[manjeera8]

Thanks @VolvoGirl ! Very clearly articulated 🙂