Remember, 1099-Misc is NOT a W2!

Paying taxes is fun isn’t it?

I tried to be responsible and start working on my taxes in February, and my first rough draft looked pretty promising. I wasn’t sure exactly how, but that first attempt at TurboTax made it look like I was in line for a few hundred bucks worth of refund. Still though, even with the stimulus programs, I expected to end up paying something so I gave it a second go over.

And that’s where I saw the crucial little detail that changed my tax status by a thousand bucks: The dumb number on the income forms actually means something!

See, I guess W2s are issued when an employer deducts and pays payroll taxes. 1099s on the other hand, don’t have any taxes removed so income received on those forms owes the full ~15% for Social Security, Medicare, etc. . .

Well, at least between the standard deduction and some of the costs of doing business online (hosting, internet, domain registrations, etc) can help bring down the percentage rate, but its not enough to get out of any taxes whatsoever.

So its kind of strange to me to be making so little money and still owing the government. But this is a good reminder that when they say “X% of people don’t pay income taxes,” those people are still paying federal taxes on their income through payroll. A lot of people are using the progressivity of the income tax to whine about people who don’t pay it, but almost everyone ends up paying some federal taxes on their income whether its cash out of pocket or through payroll with holding. In fact, a majority of Americans pay more for payroll taxes than they do for income taxes, so to ignore the payroll part and focus exclusively on the “Big I” Income tax is incredibly disingenuous. Apparently though, its incredibly effective because I’ve seen about three dozen articles making this or a similar claim.

Either way, be sure to check and double check those returns. The tax man seems to be targetting independent contractors this year, and the last thing any one wants is to invite an IRS agent over for an audit!


  1. hey John,
    I’ve always thought the same thing on Federal taxes. Everyone (that earns any money) pays federal tax (thought people that don’t make very much get “earned income credits” back and may actually make money). While everyone pays “Federal tax”, about half of people only pay payroll tax and not income tax. Payroll tax is supposedly taken from you when you are working, and then given back to you when you retire (in reality it is spent on current retirees and other government stuff and replaced with IOUs, but that’s another story). Income tax is what pays for all the government services, like defense, the FDA, the IRS, etc. It’s important to understand that it is INCOME tax that a lot of people don’t pay, but everyone gets hit with PAYROLL tax. In the end, if you make any money, Uncle Sam will take some of it, and the more you make, the more he will take. Hey, that rhymes! Happy Tax Day. 🙂

  2. I wrote the IRS a fat check for my payroll, then I turn around to the bookmarking sites and see a bunch of posts claiming that people in my income bracket don’t end up paying taxes.

    Yea right!

    I can’t imagine how broke someone would have to be to end up with absolutely no or negative federal tax liabilities, but my plan next year is to get my rates up anyway.

    Here’s to a strong 2010!

  3. This year I waited until the last week before taxes were due before I actually got around to doing them. I fired up the H&R Block tax software and to my surprise I was done in about 40 minutes. I expected it to take longer but the program does a decent job of guiding you through everything. I don’t even know if it used any other forms aside from the 1040, because it’s all automatic. I would recommend it to anyone who’s having any confusion about the different tax forms.

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