A W-4 tax form is an IRS form that you use to indicate how much an employer should withhold. It's generally only used by legal employees of a company, while contractors use a separate form called a W-9 that specifies basic information like name and Social Security number. At the end of the year, employees receive a W-2 tax form recording their earnings, while contractors receive another form called a 1099.
W-9 vs. W-4
If you're starting a new job, you will likely be asked to fill out a tax form called a W-4. That form includes a worksheet designed to tell your employer how much tax to withhold from your paychecks.
Depending on your answers to various questions about how many jobs you have, whether you're married and whether you have dependents, you're allowed to claim a certain number of allowances which reduces your withholding for federal income tax. Some taxpayers don't claim all their allowances in order to boost their withholding as a way to save and avoid a surprise tax bill. After the tax year ends, you'll receive a W-2 form outlining how much you made and how much was withheld for federal and state income tax and for Social Security and Medicare tax.
If you're starting as an independent contractor, sometimes informally called a 1099 employee, you'll usually fill out a W-9 form. This asks less about your tax situation and mostly just gathers your Social Security number or other taxpayer ID for your client to use when filing with the IRS. Legally, as a contractor you are not an employee, and your client will not normally withhold taxes on your behalf. At the end of the year, you'll receive a 1099 form as an independent contractor outlining how much you made from that client. Include this form with your taxes.
Self-Employment Tax and Estimated Tax
If you are an independent contractor, you will not have tax withheld from your pay since you are considered self-employed, but you are still responsible for making sure the IRS and your state tax agency get their share.
If you anticipate owing tax for the year beyond any withholdings you have, you may be required to pay estimated tax. Generally, this means you will pay your anticipated federal income tax in four quarterly installments over the course of the tax year. The IRS provides guidelines to help determine how much to pay. If you do not pay enough tax throughout the year, you may owe a penalty when you file your taxes. Various states with income tax have their own rules on estimated tax and penalties for underpayment.
You are also required to pay self-employment tax when you are self-employed. This covers your contributions to Medicare and Social Security, including what's normally the employer portion and the typical employee portion of these taxes.
2018 Tax Law Changes
As of 2018, the standard deduction is increasing, personal exemptions are being eliminated from the tax code and income tax bracket rates are generally decreasing. At the same time, some deductions are being capped, including deductions for state and local taxes. Some deductions are being eliminated, including deductions for employee expenses.
If you are an employee, you may want to revise your W-4 forms to adjust for your new expected tax liability. If you are a contractor, you may be able to qualify for a new 20 percent tax deduction available to self-employed people and some small business owners. You don't have to itemize your deductions to take this tax break.
2017 Tax Law Situation
In 2017, the standard deduction was lower, but personal exemptions were available for yourself and your dependents. Income tax rates were generally higher across the board. Employees were able to take some deductions for eligible work-related expenses.
- IRS: About Form 1099-MISC, Miscellaneous Income
- IRS: About Form W-9, Request for Taxpayer Identification Number and Certification
- IRS: About Form W-4, Employee's Withholding Allowance Certificate
- IRS: Self-Employment Tax (Social Security and Medicare Taxes)
- IRS: Estimated Taxes
- Forbes: New: IRS Announces 2018 Tax Rates, Standard Deductions, Exemption Amounts And More
- CNBC: How to Figure Out Whether You Qualify for This 20 Percent Tax Break
Steven Melendez is an independent journalist with a background in technology and business. He has written for a variety of business publications including Fast Company, the Wall Street Journal, Innovation Leader and Ad Age. He was awarded the Knight Foundation scholarship to Northwestern University's Medill School of Journalism.