One area where employers sometimes get confused is whether to give a worker a W2 or a 1099 tax form at the end of the year. Determining the right form essentially boils down to whether a worker is classified as an employee or as an independent contractor/freelancer. While making this distinction may sound easy on paper, there can be a lot of question marks when you get down to it. Let’s now compare a W2 vs. 1099 and highlight the key differences.
What is a W2 Tax Form?
According to Investopedia, a W2 is “the form that an employer must send to an employee and the IRS at the end of the year. The W2 form reports an employee’s annual wages and the amount of taxes withheld from his or her paycheck.” Simply put, this form is meant for regular employees in the traditional sense who receive regular salaries.
These individuals work directly for your business and are in no way self-employed, independent contractors or freelancers. In many cases, they receive benefits like discounted health insurance, retirement plans, life insurance etc. They also pay less in Social Security and Medicare taxes because their employers typically contribute half. With a W2, an employee’s taxes are automatically deducted from their paycheck, and this money is sent to the government.
What is a 1099 Tax Form?
A 1099-Misc is defined as “a tax form that reports the year-end summary of all non-employee compensation. This form covers rent, royalties, self-employment and independent contractor income, crop insurance proceeds and several other kinds of miscellaneous income.” This is meant for workers who aren’t employees in the traditional sense and don’t receive a regular salary.
These individuals are usually classified as independent contractors or freelancers and don’t typically receive benefits. They must also pay the full 15.3% of Social Security and Medicare taxes as well as self-employment tax.
Unlike traditional employees with W2s, they get their full pay without any automatic deductions. However, they are responsible for keeping track of their taxes and submitting them to the government themselves. If an independent contractor earns $600 or more throughout the year, they’re supposed to receive a 1099 form.
What it Means For You as an Employer
Generally speaking, it’s better for you to classify workers as independent contractors or freelancers instead of employees. That’s because you’re not required to pay all of the benefits like you would with a regular employee, and you can change or terminate a contract more easily. However, it’s crucial that you classify workers correctly because making the wrong choice can result in IRS penalties. If you have any questions on this topic, it’s a good idea to consult this guide from the IRS to determine whether to classify a worker as an employee or independent contractor.
As a business owner, it’s important that you understand the differences between a W2 vs. 1099. This will ensure that you provide your workers with the correct tax form and should prevent many complications on your end.