Given the long hours you spend delivering safe, competent patient care, you probably don't give employment taxes much thought (unless you have a question about your paycheck). While numbers are probably the last thing you want to read about, it's essential to have a basic understanding of payroll and income taxes to ensure you meet your tax obligations and maintain financial stability.
But don't worry; we've tried to make reading this post as painless as possible, covering key points that will help you navigate the complex world of taxation successfully.
W-2 and 1099 Employment Classifications
No matter who you are or what you do, you must pay taxes if you earn an income. When and how much you pay depends on your employment classification.
Your employment classification concerns the tax form you use to report your annual income and payroll deductions to the Internal Revenue Service (IRS) during tax time. When you submit a Form W-2, you're a company employee. When you submit a Form 1099-NEC, you're a self-employed contractor.
While many nursing jobs apps use 1099 contractors to fill scheduling gaps at healthcare facilities, you're a W-2 employee when you work with ShiftMed. It's the best employment classification because you pay less in payroll taxes, have an easier time filing your tax return, and more.
Fundamental Differences Between W-2 and 1099
The difference between W-2 employees and 1099 contractors can initially seem fuzzy. However, things become much clearer when you break down the fundamental differences between the two.
Employment Tax Management
If you're a W-2 employee, you pay your employment taxes (payroll and income) incrementally. Your employer withholds these taxes from your paychecks and submits your payments to the federal government on your behalf and, in many cases, your state government.
You don't have to do any calculations or paperwork. Your employer handles it all for you. Take note your employer doesn't keep any of the money they're withholding from your paychecks, and they don't determine the amount withheld from your wages—the government does.
At the end of the year, your employer sends you a Form W-2 that lists your total income and tax withholdings for the year. You use this form to file your tax return by April 15.
If you're a 1099 contractor, your tax payment situation is much more complicated and requires careful recordkeeping, especially if you receive payment from multiple entities. You must complete several forms and calculate and file your estimated taxes four times a year. Your estimated tax payments must encompass federal income tax and self-employment tax.
Any entity you worked for as a 1099 contractor will send you a Form 1099-NEC at the end of the year that details how much they paid you. You can use this information to double-check your reported earnings for the year during tax time.
Employee Benefits
W-2 employees are entitled to participate in company benefits such as health, dental, and life insurance, whereas 1099 contractors must source and pay for insurance on their own, which is expensive.
Check out the comprehensive employee benefits that ShiftMed offers its W-2 healthcare professionals.
Labor Protection
Labor laws protect W-2 employees regarding minimum wage, workers' compensation insurance, unemployment insurance, and unpaid overtime. 1099 contractors don't have these same protection rights and must save on their own should they get hurt on the job or become unemployed.
Income Stability
1099 contractors tend to be under more scrutiny than W-2 employees regarding financial lending, whether it's a mortgage, car, or student loan. Income is easier to verify as a W-2 employee. It's a matter of showing recent pay stubs to a lender. A 1099 contractor can show their invoices, but lenders don't always view that as a stable income.
Income Tax vs. Payroll Tax
Many folks look at income and payroll tax as one and the same—but they’re not. They’re separate groups under the employment taxes umbrella that fund different things. Income tax funds public services such as defense, education, and transportation, whereas payroll tax funds Social Security and Medicare.
Payroll Tax
Payroll tax comprises Social Security and Medicare taxes, collectively known as FICA (Federal Insurance Contributions Act). Folks pay a flat percentage rate based on their income, which the government determines.
In a W-2 situation, FICA is a shared employee-employer tax. The employee pays 7.65%, and the employer pays 7.65% for a combined 15.3%. W-2 employees pay into FICA every paycheck.
The 1099 world refers to FICA as self-employment tax. Contractors must pay 15.3% of these taxes. It's a two-part tax, with 12.4% going to Social Security and 2.9% going to Medicare. Contractors must estimate and pay self-employment tax quarterly.
Income Tax
Income tax consists of federal, state, and local taxes. Everyone who works must pay federal income tax, but only some have to pay state and local income tax. As of 2022, Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming don’t have a state income tax. But if you have to pay state and local income tax, rates vary based on where you live.
Levied by the IRS, federal income tax rates are progressive, so as your taxable income increases, your tax rate does, too. Rates range from 10% to 37% and take effect at specific income thresholds. The income ranges that correspond with specific rates are known as tax brackets.
Federal income tax applies to earnings that contribute to your income, including salaries, wages, bonuses, commissions, tips, investment income, and certain types of unearned income, such as interest rates and dividends.
When you're a W-2 employee, the government requires your employer to withhold federal and often state income taxes from every paycheck. The amount withheld depends on your income, filing status, and any allowances claimed on your Form W-4.
A W-4 is the Employee's Withholding Allowance Certificate you complete when you start working for a new employer. You can update your W-4 whenever you want. Many folks update their form when their personal or financial situation changes, such as going from single to married or having a baby (new dependent). It's important to keep this form updated to avoid overpaying or underpaying on your taxes.
ShiftMed nurses can update their W-4 in the Banking & Taxes section of the ShiftMed app anytime.
If you're a 1099 contractor, you must estimate and pay your federal income tax quarterly. If your payment is calculated correctly and submitted on time, you shouldn’t have to worry about a hefty tax bill when filing your tax return in April. But it’s a different story if your calculations are off. Contractors often use an income tax calculator to help estimate their payments.
Understanding W-2 Pay Stubs
When you're a W-2 employee, you get a pay stub (a.k.a. pay statement or wage statement) every time you get paid. It's a document that summarizes your gross pay, net pay, taxes, and deductions. Pay stubs verify compensation accuracy and serve as proof of income for employees trying to get loan approval.
Employment Tax Withholdings
You'll see a breakdown on your pay stub if you want to know the amount of federal income tax, state income tax, and FICA tax withheld from your check. You'll also see how much you've paid into these taxes year-to-date.
Payroll Deductions
Every W-2 employee has different payroll deductions. Some of these deductions are voluntary (medical and dental insurance) and involuntary (wage garnishments). Paying attention to these deductions can help you manage your finances effectively.
Net Income vs. Gross Income
You'll see two income amounts on your pay stub: net and gross. Net income is your take-home pay, meaning all the taxes and deductions you must pay have been withheld. Your employer sends your tax withholdings to the government and your payroll deductions to the appropriate parties.
Gross income is your total earnings before taxes and deductions are withheld. Yes, it's painful to see in print because you're thinking about everything you could buy if you had that money. Benjamin Franklin hit the nail on the head when he said, "In this world, nothing is certain except death and taxes."
Misconception About 1099 Earnings
When you're a 1099 contractor, it feels like you earn more than a W-2 employee when payday arrives. But truth be told, it only feels that way because employment taxes weren't withheld from your paycheck.
Remember, W-2 employees pay employment taxes every payday, and 1099 contractors pay employment taxes every quarter. And when you think about it, W-2 employees earn more because they only pay 7.65% into Social Security and Medicare, whereas 1099 contractors pay 15.3%.
Payroll Tax Fact or Fiction
In the world of nursing jobs apps, there are a lot of myths, untruths, and confusion swirling around about employment taxes—and they stem from some agencies classifying healthcare professionals as 1099 contractors and others as W-2 employees. So, we'll set the record straight—right here, right now.
FACT: ShiftMed healthcare professionals are W-2 employees who pay employment taxes (income and payroll) to the government every paycheck.
FICTION: ShiftMed decides how much income and payroll taxes to withhold from your paycheck.
FACT: The government decides how much income and payroll taxes to withhold from your paycheck.
FICTION: ShiftMed keeps some of the employment tax money being withheld from your paycheck.
FACT: ShiftMed does not keep any of your employment tax withholdings. We submit all of your income and payroll tax payments to the government on your behalf.
Conclusion
You made it! Hopefully, we didn't fry your brain with all this information. As you can tell, having a basic understanding of how employment taxes work goes a long way in helping you meet your tax obligations, avoid potential penalties, and make informed financial decisions.
If you're not already claiming nursing shifts through the ShiftMed app, what's the holdup? Download our top nursing jobs app today and start enjoying the flexibility of working when, where, and how often you want!
Disclaimer: ShiftMed does not provide legal, accounting, or tax advice. This content is for informational purposes only and is not intended to provide legal, accounting, or tax advice. Please refer to a professional advisor prior to acting on the information set forth herein.