Form W-2 and Form 1099-MISC: What’s the Difference?
Sometimes, employees are classified improperly based on their function at a company. If this happens, an employer could be fined. To help you avoid this issue, we’ve compiled a list of questions that can help determine an employee’s correct classification, along with information to determine which form to use.
Questions to Ask
To determine the classification of your employees, the IRS has provided questions to ask so you can maintain compliance:
- Behavioral control: is the employer providing extensive instructions on how, when, and where work is to be done or what tools or equipment to use?
- Financial control: are the business aspects of the worker’s job controlled by the payer? For example, whether expenses are reimbursed or who provides tools/supplies.
- Relationship of the parties: are there written contracts or employee-type benefits, like a pension plan or insurance? Will the relationship continue and is the work performed a key aspect of the business?
Understanding the Difference Between W-2s and 1099s
Form W-2 is for employees and shows their income for the year. Form 1099-MISC is for contractors and shows the money you paid them during the year. Employers should not issue both types to the same identification number.
Reporting Income for Employees
Employers are required to withhold income tax and the employee portion of social security and Medicare taxes. You are responsible for paying social security, Medicare, and unemployment (FUTA) taxes on their employees’ wages. You’ll also need to distribute Form W-2s to your employees showing the amount of taxes withheld from their pay.
Reporting Income for Independent Contractors
Employers may be required to provide Form 1099-MISC to report what is paid to independent contractors. You are not responsible for withholding taxes from independent contractors’ pay, they are responsible for paying their own income tax and self-employment tax.
It’s All About Classification
Make sure you are classifying employees and independent contractors correctly to avoid any issues with compliance. That’s why it’s important to use the IRS classification questions so you are issuing the proper forms to your workers.
For more information on classification of workers, check out the following resources:
How APS Can Help
APS provides a suite of solutions and services so you can easily manage compliance and reporting:
- Our secure, centralized database stores and tracks Forms W-2 and 1099-MISC for better compliance.
- Our Analytics and Reporting solution provides employee classification reports as well as reporting for common W-2 errors reports so your information is always accurate and up to date.
- Our tax compliance experts help you with year-end processing of forms W-2, W-3, and 1099-MISC, saving you time and money.
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