What to Know About the Tax Treatment of Wages and Salaries
If you receive wage income at any point during the calendar year, you will likely need to include it on your federal income tax return. This is true whether you’re an employee of a company that you don’t own, an employee of a corporation that you do own, or a sole proprietor.
In most cases, employees will receive a Form W-2 listing their earnings for the year while self-employed individuals will receive a Form 1099-NEC.
What Counts as Wage Income?
Generally speaking, any money that is earned as a result of performing services for an employer is considered wage income. If you’re self-employed, any services rendered on behalf of a paying client is typically considered wage income. However, if your business is structured as a corporation, it may be possible to label a portion of your earnings as an owner distribution. Owner distributions are considered ordinary income, which means that they aren’t subject to FICA taxes.
In most cases, you’ll need to declare any tips that you receive during the course of a year on your tax return. It’s important to note that wage income is taxed roughly the same way whether you are paid an hourly rate or an annual salary.
All of Your Income Appears on Your Tax Return
It’s customary for income and payroll taxes to be withheld from your paycheck throughout the year. If you are self-employed, you are required to make an estimated tax payment once per quarter. These payments will also include any payroll taxes that you have accrued during the previous three months.
However, your gross income is the amount that is reported on your federal income tax return. In addition to wage and salary earnings, you should include any other income that you received during the year. Other earnings may include royalties, bonuses, or capital gains from the sale of stocks or bonds.
An Accountant May Answer Any Questions That You Might Have
If you have any questions about how wages and salaries are taxed, it may be a good idea to speak with a tax accountant. He or she may also be able to fill out, submit or review any tax documents that may need to be sent to the government. It is worth noting that you are held liable for any information that is sent to the government even if an accountant does so on your behalf. Therefore, if you notice any errors on your return, it’s in your best interest to fix them as quickly as possible.