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December, 2019

What’s the Difference Between W-2s and 1099s?

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What’s the Difference Between Form W-2 and Form 1099-MISC?

Each year, employers must issue W-2s and 1099s to their employees. However, what is the difference between these two forms? If an employer provides the wrong form to an employee, it could result in potential fines. To avoid this issue, let’s look at the differences between Form W-2 and Form 1099-MISC and how to determine which form to use so you can maintain compliance during year-end processing.

Questions to Ask

What is Form W-2?

Form W-2 is the tax form used to report wages paid to employees for the year. Employers must provide a W-2 to each employee and to the IRS at the end of each year. Form W-2 includes information about the tax year, including:

  • Taxable Income: How much an employee made and how much of that income was withheld for federal taxes.
  • Social Security and Medicare Income: How was much was withheld for FICA taxes.
  • State Income: How much was withheld for state income taxes, if any.

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.

Difference Between W-2s and 1099s

What is Form 1099-MISC?

Form 1099-MISC is furnished to individuals and businesses working for your business who are not employees. Employers are only required to issue a 1099 if they have paid at least $600 in services, rents, prizes or awards, and other income payments.

Reporting Income for Independent Contractors

Employers may be required to provide Form 1099-MISC to report what is paid to independent contractors. Withholding, Social Security, and Medicare wages are not reported on a Form 1099-MISC because income taxes are not withheld for independent contractors. They are responsible for paying their own income tax and self-employment tax.

How Do I Know Which Form to Furnish?

Knowing which form to provide at the end of the year depends on whether you’re classifying your employees and independent contractors correctly. To better understand this process, let’s look at how the IRS classifies workers.

Employee Classification

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? Is the work performed a key aspect of the business?

Additional Resources

For more information on the classification of workers, check out the following resources:

What Else Should I Know About W-2s and 1099s?

For more information on the classification of workers, check out the following resources:

  • Forms W-2 and 1099-MISC must be furnished to employees and independent contractors by January 31st each year.
  • Forms W-2 should be filed with the Social Security Administration along with a W-3 transmittal form by January 31st each year.
  • Forms 1099-MISC should also be filed with the Social Security Administration along with a 1096 transmittal form by January 31st each year.

State Unemployment wage bases

For more updates on state unemployment wage base changes, visit our SUTA Wage Bases page.

FUTA Credit Reductions

For more updates on state eligibility, visit our FUTA Credit Reductions page.

Payroll Tax Rates and Changes

Visit our Payroll Taxes: Rates and Changes page to make sure you stay compliant.

QUOTE

Linda

Business Administrator, Christ’s Church

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