When the 12 months winds down, it’s time to start out occupied with latest tax adjustments and the way they have an effect on you, particularly when you run a small enterprise. However conserving tax particulars straight is hard — even for individuals who reside and breathe the business. One of the widespread questions throughout this time of 12 months is “who wants a 1099 or a W-2?”
To assist type via the types maze, consultants at Greatland Company, an organization that gives W-2 and 1099 tax types and e-filing providers to small companies, have supplied background on these types.
A W-2 is the shape employers will use to report yearly wage and withholding info. An employer wants to offer this type to workers no later than Jan. 31 of the next 12 months. Staff will obtain 4 copies of this type to report federal, state, and native earnings and keep a replica for their very own data.
A 1099-MISC is the shape used to report miscellaneous earnings, reminiscent of earnings earned as a contract or freelance employee, in addition to charges, royalties, commissions, and rental earnings. When you’re a enterprise that makes use of contractors or freelance employees who acquired not less than $600 through the 12 months, you should present them with a 1099-MISC type to report this earnings.
You will discover a full record of year-end reporting types and directions on the IRS’s web site.
Worker vs. Unbiased Contractor
Briefly, 1099s and W-2s are two completely different tax types used for 2 sorts of employees. Unbiased contractors obtain 1099 types and conventional workers will obtain a W-2 yearly, however typically it may be troublesome to classify employees.
An worker is anybody who performs providers for an employer and the employer can management what might be accomplished and the way will probably be accomplished. That is true even when an employer offers an worker freedom of motion.
A person is an impartial contractor if the payer has the fitting to manage or direct solely the results of the work and never what might be accomplished or how will probably be accomplished. An employer typically doesn’t withhold federal earnings tax or Social Safety/Medicare taxes for impartial contractors.
Avoiding Penalties
“Companies and impartial contractors aren’t all the time conscious of what they should do throughout tax season, but it surely’s turning into an increasing number of necessary that they know their tasks to keep away from penalties,” says Janice Krueger, a spokesperson for Greatland.
If an employer misclassifies an worker as an impartial contractor and has no affordable foundation for doing so, the employer is chargeable for employment taxes for that employee.
Many view inappropriate employee standing determinations as a tax loophole, and much more misclassifications are because of a misunderstanding of the necessities, inflicting the IRS to closely monitor companies. Estimates are that 20% of companies misclassify employees. So, when you’re an employer, watch out.
Disclaimer: The content material on this web page is for informational functions solely, and doesn’t represent authorized, tax, or accounting recommendation. You probably have particular questions on any of those matters, search the counsel of a licensed skilled.
