W-2s, W-4s, and 1099s
Ramya Racharla
Student at the Kelley School of Business | IUB | Pursuing a double major in Life and Finance
Getting your first job is an exciting experience and your first step towards personal and financial freedom. But when you’re earning an income, handling income and taxes on your own can be confusing, especially if no one has told you how to.?
Today’s topic is near and dear to me, because I was thrown into my first job like a dead worm to a lake of piranhas. It wasn’t until 2 years after I left it, that I realized how sketchy the whole thing was. Disregarding the fact that I was hired on the spot with no questions asked, I remember that I asked my manager about the process for W-4 and W-2 forms and she said, “the boss keeps it simple with no forms.”
Even at 16, I heard the warning bells and was confused how you could even file taxes without those forms. Unfortunately though, my young na?ve self could only acquiesce and move on. It wasn’t until 2 years later that I realized the IRS was mistakenly sitting on some of my money.?
Why? Because it seems that my former employer had graciously taken it upon himself to save both of our time by refusing to provide me with a W-4 form.
If I had known to ask these questions before joining, I likely would have realized that I should probably just keep looking for a job. Instead, I now have to waste time, money, and energy just to get back my own money that’s wrongly sitting with the IRS.
And if you’re still tuning in after that long rant, the reason I’m including my story is because it showed me that like myself, there are probably thousands of teens who start working part-time jobs without first being equipped with the proper knowledge of all you should be aware of when you begin working.
Here are the 3 things that in my experience, are need-to-know before you start working:
The first thing you should know when you’re looking to start working is to understand what kind of employee you are. There are two types of employment: W2 employees and 1099 employees.?
A W-2 employee is someone working a regular part-time or full-time job under one employer. The typical 9-5 routine.?
A 1099 employee is a contractor, so they’re considered to be self-employed. You could think of 1099 employees as freelancers who work for different individuals or companies for a short period of time, and typically only for a specific project. Once that task is done, there is nothing tying the contractor and the company together.
The type of employee you’ll be depends on your chosen career and field. It’s not like one pays more than the other - that depends on the industry and the work - but the responsibilities you’ll have are different for each.?
When you’re a W-2 employee, your employer helps you in 2 ways in which they wouldn’t if you were a 1099 employee.?
a: Withholding taxes for you
Everytime you get your pay stub, you should see about 4 or 5 deductions that make your final income for that month less than the actual income you earned. Those deductions are your taxes, which means your employer technically already paid them for you from your paycheck.
b: 50/50 FICA contributions
Each employee-employer relationship has to pay 15.3% of the employee’s income towards FICA (Social Security & Medicare). As a W-2 employee, you pay 7.65% of your income towards FICA and your employer will cover the other 7.65%.?
When you’re a 1099 employee, your employer won’t give you these same benefits. They don’t withhold taxes for you when you get paid and they also won’t cover half of your FICA contributions. So when it comes time to file your taxes in April, you’ll be fully responsible for properly paying all your income taxes. And since you’re self-employed, you are considered to be both the employee and the employer - this means that the full 15.3% of FICA contributions has to come entirely from you.?
All that said, both kinds of employment have their own pros and cons which will affect different people differently. While W-2 employment comes with security, benefits, and stability, there’s also less independence and a rigid structure. Whereas 1099 employment comes with more freedom and control, it’s more unpredictable, expensive, and fully self-reliant.
So, definitely worth putting some thought into which kind of employment suits you better and is more beneficial towards your lifestyle and goals.
The final piece of the puzzle that rounds all this out are the forms. Depending on your type of employment, you will need to make sure you have the right tax and income forms.
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For W-2 employees only:
Every time you start a new job, you need to fill out a W-4 form. If your employer doesn’t provide you one, make sure you ask and get it. They are legally required to give you one.
A W-4 form is where you, as the employee, provide your employer with all your financial details. This tells your employer how much they should deduct from your paycheck towards taxes. If you fill out this information incorrectly, your employer might withhold more or less from your paycheck than is necessary.?
At the beginning of each year, your employer will send you a copy of your W-2 form for the previous year. This is the form that details all your income that year and how much your employer deducted towards taxes. You will need this when filing your tax return so you can show the IRS that your taxes were being accurately deducted each time you got your salary. And in case they were not accurately deducted, you can fix that when you’re filing your tax return.?
You should receive your W-2 form from your employer by January 31st, or February at the latest. They are legally required to send you this.
In my case, my employer refused to provide me with a W-4 form and I wasn’t able to give them my financial information. When an employee doesn’t fill out a W-4, the employer has to treat them as a single tax-filer, and deduct from their paycheck accordingly, even if that tax status may not be correct. It’s then up to the employee to fix that in their tax returns.
As you can guess, my employer also treated me as a single tax-filer and deducted from my income just so. You might be able to tell by now that in doing so, he withheld the wrong amounts and it is now my responsibility to rectify that mistake through filing a tax return.?
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For 1099 employees only:
A 1099 form is in principle, the same as a W-2 form. All your employers who contracted you in the last year are required to send you a 1099 form (by Jan. 31) that details how much they paid you. Any additional non-employment income you earned also requires you to fill a 1099 form. For example, passive income such as rental income or stock income. When it comes time to pay your taxes, you use these forms to figure out how much you owe in federal income, state income, and FICA contributions.?
For all employees:?
Each employer has their own set-up of pay periods. Weekly, every two weeks, or the last business day of the month are the most common pay periods. That’s when you receive your paycheck for the hours you’ve worked so far. Make sure you receive it and review it for any mistakes. Also, keep track of the hours you’ve worked so you know you’re getting the right amount. If your employer pays by check, ask them to deposit it directly to the bank instead since it’s easy to lose it or forget to deposit it yourself.?
One last thing: you only pay taxes if you meet something called the “standard deduction”. For each type of tax filing status (single, joint, head of household), you have to make above a certain amount of money each year before you’re required to pay income taxes. But this has no effect on FICA contributions - you have to contribute even if your income is below the standard deduction.?
For example, if you’re a working individual and making less than $14,600 in 2024, you don’t have to pay income taxes. This information is mostly going to be useful to people such as students casually working part-time, like a summer job, since they likely won’t exceed this amount and thus will not have to pay any taxes (except for Social Security and Medicare).?
And that’s a wrap. These are all the things I wish someone had explained to me before I started working. Now I know that not only are all these things everyone should know, but you also have the right to know them.