W4s, W2s, W9s and 1099s!
If you listened to my previous podcast episode on W4s you probably heard a cute tale of a wide-eyed bushy tailed me filling out a W4 for the first time...and that story is mostly true. My first job was as a hostess at a restaurant but really what I remember about filling out a W4 was terror, and I was about 25 years old. By this time I had graduated college, gotten married, adopted a dog, relocated from LA to Vegas and was seriously considering becoming a CPA. I’d done all these adult things but when confronted with a W4 became almost catatonic..
You see, until I was 25 I was undocumented so I didn’t qualify for jobs that required a W4. So when I was confronted with this form it was a shock to my system and if you’ve seen a W4, its not that big! Its mostly instructions which I guess makes it scary but its not that big! So, what did I do? Well, I did what I always do in situations that cause me alarm: I read. I read that dang thing cover to cover and after reading the instructions I realized that this wasn’t something to be afraid of. This was something I could master. So, here’s what I learned:
A W4 is the form the IRS hopes you’ll use to help you determine how much to tell your employer to withhold.
In the past, if properly done, it would ensure you had enough taxes withheld so you wouldn’t owe at the end of the year; recently however this has changed with the new tax law so it's more important than ever that you do a W4 check-up. I’ll put a link to the IRS’s W4 calculator in the show notes in case you’re interested.
Now, Proudly having conquered that tiny W4, I eagerly awaited for that fat refund come april of next year. But then I got another shocker! Another form! This time in my mailbox. What was this W2? Ah! Back to the books:
A W2 is the form employers use to report your salary and wage information to the taxing authorities.
It has the total federal, state and local taxes withheld as well as other identifying information.
And your employer must mail or hand-deliver your W-2 to you no later than January 31st.
Cool, no biggie. I used that W2 and I got my refund, and if you’re an employee that’s typically all you’ll need in terms of reporting your income; but if you’re a first time entrepreneur or side-hustler you’ll need to acquaint yourself with W9s and 1099s.
Snore fest Wendy! We’re here for fun!
Okay! Wait! Before you tune out, let me ask you: Why are you in business?
Well, duh Wendy to make money!
Right! So when you start booking those bigger projects, you know the ones that’ll VIP you straight to the three comma club, you’ll need to have a W9 handy so you can get paid! A W9 serves a similar purpose as the W2. It tells the person or business paying you your business’s name, the type of business it is (for example sole proprietor, LLC, partnership, corporation), and your business’s tax identifying number. That way, they’ll know how to pay you and how to record it in their books. Similarly, if you’re hiring contractors, and you pay them more than $600, you’ll to have them provide you with a W9. That way you can accurately record your expenses and 1099 them at the end of the year. Which leads us into the last form we’ll be discussing today. The 1099!
Now, there’s tons of 1099 forms but the one you’ll most commonly encounter is the 1099-misc. This form is used to report how much money you’ve paid a vendor (if you’re issuing the 1099) or how much someone, other than your employer, has paid you (if you’re receiving the 1099).
Now, If you’ve been following along, you’ve heard the two most common ways the IRS knows your gross income: the W2 and the 1099; so you’ll want to report every single cent on those forms...but, what happens when your income goes unreported? For example, what happens if you take on a project and they don’t give you a 1099 at the end of the year? Should you tell the government and get taxed on those hard earned dollars? Or sneak it off and hope they never find out?
Well, let me tell you, when I started working in tax resolution I was shocked that a portion of the people we helped were in hot water because they failed to report income. Sometimes they did it sneakily in hopes that they’d never be caught but the majority simply never received their 1099. Either because they moved or because it simply never arrived in the mail.
So...how can you make sure you’re reporting all of your taxable income? Here are some tips to tackle your taxes:
Start keeping track of your income and expenses so you can accurately report them at the end of the year. A simple spreadsheet will suffice or if you want to get get started on the right foot: here are my affiliate links to Quickbooks Self-Employed (great for newbies who need mileage tracking) and Freshbooks (great for newbies who need time tracking functionality).
Secondly, You can visit the IRS website to get a copy of the wage and income information that’s been reported to the IRS on your behalf. You’ll be able to get your W2s and 1099s provided they’ve been processed by the agency.
Keeping track of the income you make during the year and checking your records against the records the IRS has are great ways to ensure you’re including all of your taxable income. Now, it may seem like a duffus move to claim income that’s unreported to the IRS but you’ll want to avoid any additional tax assessment, if they find out (and boy, do they find out) not to mention the hefty penalties and interest that you’ll accrue. Don’t believe me? Wait until you find out what our friend in the next segment Shocking Scandals and Dirty Deeds - Tax Edition will get for underreporting income.
Now, snuggle in for Shocking Scandals and Dirty Deeds - Tax Edition.
Today’s shocking scandal and dirty deed has been perpetrated by none other than Mr. Jeffrey James Palmer of Holland, Michigan. In addition to a little embezzling (a little under $340K), this outstanding attorney, is being charged with lying on his federal income tax returns because he didn’t report the ill-gotten income, and he’s looking at up to three years in prison.
Now, obviously he’s done something criminal, and the IRS doesn’t make a habit of picking on people . So, if you under report your income chances are you won’t go to prison, but do you really want that extra anxiety over a few bucks? No. What you need to do is find legitimate ways to maximize your tax deductions and keep more money in your pocket. And guess what? You’re already doing that! By listening to Tax Tribe the Podcast and reading this blog.
Until next time, have a wonderful day!
P.S. this is not legal advice specific to you or your situation; and you should consult a professional (like me!) to determine what is right for you and your business.