In 2008, I have worked both as a W2 employee and an independent contractor (my wages are split between the two about half and half).

This is the first year I'm paying as an independent contractor, and from what I've learned so far, you need to pay quarterly (I'm OK so far because I've really only been doing contractor work in the fourth quarter). But I also read that you need to pay fourth quarter taxes by Jan. 15.

My main question is this: If I file and pay my 1099 taxes by Jan. 15, and then a little later I file my W2 wages, how do I account for my 1099 income on the W2 form? By that point, I will have already paid my 1099 taxes, and I certainly don't want to pay twice on them. Should I just not include the 1099 wages on my W2 taxes? It's a significant amount (about half my annual income), so that doesn't seem right -- I would think I would have to disclose my entire annual salary. But how do I disclose that amount without paying taxes on it? (And will I also have to list my W2 income on my 1099 taxes?)

Also, what forms do I need to fill out for the 1099 taxes (the ones I have to file by Jan. 15)?

Thanks!!
Cindy

Cindy:

Do NOT worry about filing estimated taxes for the fourth quarter, because you qualify for one of the safe harbors that will waive any under-withholding/under-payment penalties, since this is your first year filing as an self-employed person. This assumes that your 4th quarter income does NOT exceed $150,000.

That said, your situation SCREAMS for professional tax help. You should seek out a local competent tax professional in December so you and the tax professional can begin accumulating the necessary documents to file your 2008 tax return.

You will file Form 1040, on which you will report your W-2 wages on Line #7.

You will also file Schedules C and SE to report the income and deductions for your independent contract work.

This is NOT a return for amateurs!

You need to get professional help. The fee you pay for this is more than worth it, in that the tax professional will probably save you AT LEAST the amount of his fee in tax deductions you would not know to claim if you did the return yourself.

Be sure to use a tax professional who has experience preparing returns for independent contractors. Many so-called tax professional employed by the franchise tax shops are little more than data entry personnel who rely too much on the tax software to prepare the returns. That's fine for a Form 1040EZ or even Form 1040A, but your return needs REAL tax expertise!

If you want my professional help, email me at [email protected].

As an alternative to professional tax help, TurboTax is a software program that can help you through your tax return preparation.

Cindy - you should plan on the taxes your employer withholds from your wages to cover only the W2 portion of your income - do not try to confuse the taxes owed on your wages with the taxes owed on your consulting job. You should submit a "normal" W4 to your employer with the appropriate amount of exemptions claimed, so that they withhold enough income tax to reflect your W2 wages income. It would not be a good idea to try and get your employer to withhold additional amounts to cover your 1099 income taxes as well. Instead, you shoud plan on filing estimated taxes each quarter to cover the taxes that are owed on the 1099 portion of your income. So you don't double-pay at all, but you do need to make sure that the total amount you pay in estimated taxes plus the amount withheld by your employer adds up to the amount that will be due on your total income. Then when you file your 1040 in April, you will report income from both your W2 and 1099 as ATE explained, and you will also report the taxes withheld by your employer plus the estimated amount you previously paid. If you do all this properly you should end up owing no additional tax in April. However, for this first year, as ATE says you can probably get away without the 4th quarter estimated tax payment (normally due Jan 15), IF the total amount of tax already withheld by your employer will be at least as much as your last year's total tax bill.