What's the difference between a W2 and a 1099?

Joe an electrical designer from Ridley Park, PA asked:
When I become a sub-contractor how many exemptions can I claim on my W-2. I was told 4 was a good number since I will receive more take home pay and then make mileage, etc. deductions from my income tax return.


Well, Joe, sub-contractors -- also known as self-employeds, indies, solos, freelancers -- do not have anything to do with W2s.

When an employee is hired he fills out a W4 in which states whether he is married or single and how many exemptions he will take. At year-end the employee must receive a W2 from his employer. A W2 states wages earned and taxes withheld. Bad things happen if an employer does not provide a W2.

A self-employed may be asked to fill out a W9 when he starts a project for someone. On the W9 the indie gives his name, address and social security number or his employer identification number. If the indie is paid $600 or more by an individual or a company, that individual or company should send a Form 1099-MISC to the self-employed. A 1099-MISC states self-employed income earned. Even if there's no 1099 the self-employed must report the income on his tax return -- no matter the amount. Nothing horrendous happens if a 1099-MISC is not sent to the indie.

Read these posts on employee vs self-employed for more info.

And, of course, for a complete explanation of employee vs self-employed be sure to check out the book that can simplify your tax and financial life, and save you money! Self-employed Tax Solutions.