Are you a business owner? If so, you know that hiring workers can make your life easier, but it also means that you’ll need to understand how to file taxes for your employees. Specifically, you’ll need to know whether to file a W-2 or 1099 for your workers. This blog post will explain the differences between these two forms and help you determine which is right for your business.
What is the difference between a W-2 and a 1099?
Before looking for employees for your small business, you should understand the differences between 1099 and W-2 employees. In IRS tax code 6844, the terms “1099 worker” and “W-2 employee” refer to the two types of tax forms employers must submit.
What is a 1099 worker?
A 1099 worker is an independent contractor. This means they are self-employed and not considered an employee by the company they work for. Instead of receiving a regular salary or hourly wage, a 1099 worker is paid for each job or project they complete. They are responsible for paying their taxes and providing employee benefits, such as life insurance.
Here are examples of workers who’d receive 1099:
- Gig workers who world temporary jobs, on-demand for rates that employers offer, like WordPress development.
- Freelancers who set their rates, accept the assignments they want and work on tasks for a short period of time, like wedding photographers.
- Independent contractors set their rates, pick their assignments and work on a task for a long time, like lawyers offering their services to the general public.
What is a W-2 employee?
A W-2 employee is a traditional employee who works for a company regularly. They are considered an employee of the company and are entitled to the same protections and benefits as other employees.
W-2 employees receive a regular salary or hourly wage and are typically paid regularly, such as weekly or biweekly. The company is responsible for withholding taxes from the employee’s pay and paying the employee’s portion of Social Security and Medicare taxes.
1099 vs W-2: How to decide?
- The level of control the company has over the worker: If the company controls how, when, and where the worker performs their job duties, they are more likely to be classified as a W-2 employee. If the worker has more control over their work and can set their schedule, they are more likely to be classified as a MISC 1099 independent contractor.
- The type of work being performed: If workers perform tasks integral to the company’s business, they are more likely to be classified as W-2 employees. If workers perform tasks unrelated to the company’s business, they are more likely to be classified as 1099 independent contractors.
- The duration of the working relationship: If the working relationship is expected to be ongoing, the worker is more likely to be classified as a W-2 employee. If the working relationship is temporary or project-based, the worker is more likely to be classified as a 1099 independent contractor.
Knowing when to file a W-2 form or 1099 for your workers is important. Knowing the difference between the two forms is the key to understanding when each form should be used.
Fortunately, several helpful resources are available to help you make the right decision. For example, plenty of free paystub generator apps that can assist you in determining which form is most appropriate for your workers.
Related Article: Auditing Your 401(k): Answers to Frequently Asked Questions
What is Form W-2 used for?
Form W-2 is used to report wages, tips, and other compensation paid to an employee by their employer during the tax year. The form includes information about the federal, state, and other taxes withheld from the employee's pay and other deductions, such as contributions to a retirement plan or health insurance premiums.
When is Form W-2 due to be filed?
Employers must provide Form W-2 to their employees by January 31st of the year following the tax year in which the wages were paid. They must also file a copy of the form with the Social Security Administration (SSA) by February 28th (or March 31st if filing electronically) of the same year.
What should I do if there is an error on my Form W-2?
If you believe there is an error on your Form W-2, you should first contact your employer to try to resolve the issue. If your employer agrees that there is an error, they can issue a corrected form. You can contact the IRS for assistance if you cannot resolve the issue with your employer. It's important to file your tax return on time even if you have not received a corrected form, but you should attach a statement explaining the discrepancy.
What is Form 1099 used for?
Form 1099 reports various types of income received during the tax year, such as non-employee compensation, interest, dividends, and rental income. A payer typically issues the form to the recipient of the income, and it provides information about the amount of income received and any taxes withheld.
When is Form 1099 due to be filed?
The deadline for filing Form 1099 varies depending on the type of income being reported and the income recipient. For example, Form 1099-MISC must be filed with the IRS by January 31st of the year following the tax year in which the income was paid, while Form 1099-INT must be filed by February 28th (or March 31st if filing electronically).
Do I need to report all of my income on Form 1099?
No, not all income needs to be reported on Form 1099. The form is typically used to report income not subject to withholding, such as income from self-employment, investments, or rental properties. If you receive income subject to withholding, such as wages from an employer, that income will typically be reported on Form W-2 instead of Form 1099.