Employers issue W-2s and 1099s to employees and non-employees who work for their business annually. Form 1099 is typically issued to independent contractors to enable them to report their incomes to the IRS and pay their taxes accordingly. However, Form W-2 is distributed to the employees to allow them to report their earnings and prevent withholding payroll taxes. Therefore, it is one of the critical differences between both forms.
Read on to learn the difference between W-2 and 1099 to understand what they are, who receives them, and how reporting responsibilities vary in both cases.
Everything you should know about W-2 Form
As per the guidelines, a business entrepreneur must file a Form W-2 for their employees. This also includes the employees who earn non-cash payments of $600 or more during a financial year. Listed below are a few critical factors that you should know about W-2 forms:
- W-2 Form is different from Form W-4, which tells the employers how much tax to withhold from employees’ paychecks.
- W-2 Form enables you to determine whether a person receives a refund or pays taxes during a particular period.
- Employers must remember to provide their employees with copies of their W-2s by the end of January.
Thus, every detail ranging from your first paycheck to the final payroll processed comes under Form W-2, giving an overview to employees about their earned wages, withheld taxes, and deductions taken for eligible items.
Who receives the Form W-2?
Employees who earn at least $600 from their employment shall receive a Form W-2. It includes information associated with your earnings in the particular financial year, such as taxable income, state income, and social security and medicare income. Thus, as per the requirements of the law, employers must file copies of W-2s to the IRS, Social Security Administration, and state or local tax authorities.
Everything you should know about Form 1099
Form 1099 indicates the payment made by a non-employer entity to an individual. Depending on interests, pensions, dividends, and payouts, there can be several types of 1099 Forms. Some essential factors you should know about a 1099 Form are:
- Getting a Form 1099 does not necessarily indicate that an individual has taxable money.
- Employers should provide copies of Form 1099 to contractors and freelancers by the end of January.
- Employers should remember to file Forms 1096 and 1099 along with Annual Summary and Transmittal of US Information Returns.
Who receives Form 1099?
Any individual earning at least $600 from a business where they are not employees should receive a Form 1099-NEC for tax purposes. Additionally, employers must file copies of Form 1099s to the IRS, Social Security Administration, and state or local tax authorities. Therefore, it is significant for employers to verify the following information:
- Social security numbers
- Contractor names
- Contractor addresses
However, hiring a well-experienced tax consultant is recommended to assist you in navigating and preparing Form 1099s for your contractors.
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