Employment and tax-related forms are inherently confusing. To say the federal government makes it difficult to comply with bureaucratic requirements would be an understatement. In particular, there is a general lack of understanding in regard to the W-2 and 1099.
Though most people have heard of these forms, there is lingering confusion for understandable reasons. Here’s a clear and cogent explanation of the differences between the W-2 and 1099.
The 1099 and W-2
Whether you are a business owner, manager, or employee, it is in your interest to understand the W-2 and 1099. These statements of information are government and employment-related forms, yet they are not one and the same. To be more specific, the forms are applicable to different types of employees.
The 1099-NEC form is used to report income paid to those who are not employees of the organization. As an example, an independent contractor who provides a service for a business receives a Form 1099-NEC. According to the IRS, a contributor is considered an independent contractor when the payer has the right to direct the result of the work as opposed to what will be done and the manner in which it will be done. Those who receive the 1099-NEC form for independent contractor work are required to use the data on the form when tax season rolls around.
The W-2 form is different from the W-4 form though the two are commonly confused for one another. The W-4 form is filled out at the start of employment. Employees complete this form to communicate desires in the context of tax withholdings. Alternatively, the W-2 is a statement of wages and taxes that employers issue to employees. The IRS states that employees are those who provide services that are controlled by a business that determines how the work is done.
Two Different Statements of Earnings
The W-2 form is used to report financial compensation in the form of wages and tips paid to those officially classified as employees. Employee income, along with Social Security taxes, are reported on the statement. Furthermore, the wage and withholding information is to be reported to employees along with the Social Security Administration (SSA). The Social Security Administration relays the information directly to the Internal Revenue Service (IRS).
The 1099-NEC form used for non-employees reports financial compensation in excess of $10 or greater in aggregate royalties. This form is also used to report $600 or more received in financial compensation or rent.
Tax Withholdings are the Primary Difference Between the Forms
Though the W-2 and 1099 forms are applicable to distinct types of employees, worker classification is only one difference between the two. The main distinction between the 1099 form and the W-2 form is that taxes are typically not withheld by payers for the 1099. The 1099 form does not show taxes paid to the government. Rather, this form reveals the income earned from individual clients.
Independent contractors are tasked with estimating quarterly earnings and paying taxes appropriately. Freelancers who fail to estimate their quarterly earnings and taxes are forced to pay a fine of several hundred dollars or more when filing annual taxes. Furthermore, it is also worth noting that independent contractors pay self-employment tax along with income tax.
The W-2 has More Information Than the 1099
In contrast, the W-2 form is provided to employees of businesses. The IRS mandates that the employer record earnings along with tax information and report it on the W-2. The W-2 form displays the amount of money earned from the business during the calendar year. This information is then used to determine the employee’s adjusted gross income, commonly referred to by the acronym of AGI. The form also displays tax withholding across the entirety of the year in the context of both state and federal taxes.
In summary, the W-2 serves the purpose of communicating the money paid to employees along with the money submitted to the IRS as well as state government in the form of taxes. The W-2 also presents withholding information in regard to Medicare and FICA. Furthermore, if there is a local tax applicable to the city that the employee resides in, it will be displayed on the W-2 to show the amount of money withheld from checks throughout the entirety of the year.
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