With half of the workforce transforming into freelancers in a gig economy, it’s important to understand the difference between a 1099 vs W2 employee.
Whether you’re a business owner or a freelancer, you’re responsible for understanding and complying with your state and federal employment tax laws. The problem is that it’s confusing to know which the Internal Revenue Service (IRS) forms to use for your employment situation.
If you know whether you should submit a W2 vs 1099, then you’ve cleared the most important hurdle. Both of these tax forms state how much you earn in your job. The total income you report on these forms determines how much income tax you need to pay.
Read more to find out the difference between 1099 vs W2. Once you understand which form you need, you can avoid late fees and penalties the IRS will tack onto your return if you file incorrectly.
What Is an IRS 1099 Form?
If you’re self-employed, whether as an independent contractor or you just work different side hustles, the IRS requires you to file a 1099-MISC or 1099-INT. It lets the IRS know how much you’ve earned during the year so they can determine how much you owe for income tax. These are the differences between the two types of 1099s:
- 1099-MISC is for any type of non-employee payments made to an independent contractor.
- 1099-INT is for filing any taxable interest. For example, banks send these IRS forms to anyone who paid over $10 interest during the year.
Did You Employ an Independent Contractor?
As an employer of independent contractors, you’re required to keep track of your workers’ income during the year. If they earn more than $600, you have to send them a 1099-MISC form so they can file their income taxes. If you hire several independent contractors, you can streamline the process by using a pay stub creator to save time.
You’re not required to deduct any state, federal, social security or Medicare taxes from your independent contractors’ income.
Are You an Independent Contractor?
As an independent contractor, you can work for several companies or individuals throughout the year. Each one of them is required to send you the appropriate 1099 if you earned over $600.
Since you’re self-employed, no state or federal taxes are deducted from your wages. When you file your 1040, you put the total income from all your 1099s as your annual earned income.
You’re responsible for paying any state, federal and self-employment taxes depending on your income and expenses.
What is an IRS W2 Form?
If you’re self-employed, you don’t have to worry about the IRS W2 form. The IRS requires any business with employees to report their wages on a W2 form. The form also includes any state or federal taxes withheld from your wages. It also includes contributions to social security and Medicare.
Which Is Better: 1099 vs W2
The benefits of being a W-2 employee include having a steady job and receiving benefits, such as health insurance, retirement plans or personal days.
On the other hand, 1099 independent contractors can get additional tax breaks for home office expenses, work vehicle deductions and supply costs. These are only a few of the deductions self-employed people can take. It all depends on the type of work you do.
Keep in mind, whether you have 1099 vs W2, send out your tax forms on time. This isn’t always easy, but using a payroll service or automated pay stub service can help you.
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