As business owners, it is easy to become overwhelmed with all the responsibilities and tasks that seemingly pile up as we approach the end of the year. This is especially true if your business has multiple types of workers to account for and various IRS forms to complete. To ease some of the overwhelm, it's helpful to fully understand the differences in workers, IRS forms, and preparation requirements before you begin.
What is a W-2?
The W-2 IRS form is an employee's Wage and Tax Statement. This document shows all earnings, benefits, and withheld taxes for the calendar year. As a business owner, it's your responsibility to fill out a W-2 for any employee you withheld taxes from, regardless of the amount earned.
What is a 1099?
A 1099-MISC is used to report payments that aren't subject to self-employment tax. These payments typically include things like prizes, legal fees, or rent.
A 1099-NEC is used to
report non-employment compensation that is likely subject to the
self-employment tax. As a business owner, you must file a 1099-NEC for any
non-employee workers or independent contractors who were paid more than $600
and did not have taxes withheld.
A 1099-NEC is used to report non-employment compensation that is likely subject to the self-employment tax. As a business owner, you must file a 1099-NEC for any non-employee workers or independent contractors who were paid more than $600 and did not have taxes withheld.
W-2 Employee or 1099 Independent Contractor?
The IRS classifies W2 employees and 1099 contractors depending on how they are compensated and how the business works with them. According to the IRS, there are three main factors when determining workers.
- Financial: If the company or business controls major financial
aspects of the worker's job, the worker is likely considered an employee.
For example, with W-2 employees, the company typically determines the pay
rate and whether the worker is able to seek out additional work in the
market. On the other hand, if a worker sets their own pay rate and is in
control of what jobs they take on, the worker is likely a 1099 contractor.
- Behavioral: If the company or business controls how the worker completes their job, the worker is likely a W2 employee. In most cases, if a worker is a W2 employee, the company will determine the work schedule, location, and tools or resources used to complete the work. In contrast, a 1099 independent contractor will typically determine the nature of their work and how it is completed.
- Working relationship: There are several working relationship factors, such as job security and benefits, that typically are only offered to company employees. For example, if an employer provides benefits, such as paid time off or insurance, the worker is likely a W-2 employee. Contractors are not typically offered benefits or additional security compared to employees.
Determining whether an individual is a 1099 contractor or a W-2 employee is not always black and white. If you are unsure, it's always best to consult with a business or labor professional. For more clarification, the following are examples of common workers.
W-2 Employee Examples
● Staff writers with set hours and consistent work
● Project managers with ongoing and indefinite work
● Staff designers or consultants with set hours and indefinite work
1099 Worker Examples
● Freelance writers who work based on assignments, as opposed to hours.
● Freelance designers or artists who work based on assignments, as opposed to hours.
● Consultants who support specific projects with clear start and end dates
● Performing services are gig workers who get paid for the specific event or gig worked.
As with any tax documentation, you want to ensure that all information has been gathered and is up to date before you begin. Utilize the following list to ensure that you have all necessary information for filing.
● Accurate and updated W-4
● Employer information: employer ID number, address, and tax ID number
● Gross pay: total wages, tips, and other compensation paid
● Federal and state income tax withholdings amount
● Social security wages
● Medicare wages and Medicare taxes withheld
● Any other benefits or dependent benefits taxable to the employee
● Allocated employee tips
● Stage wages and tips
● Local wages, tips, and tax withholdings, if applicable
Once all the information has been gathered, it's time to prepare the W2. It's important to note that there are four copies.
- Copy A: Social Security Administration
- Copy 1: Local, city, or state tax department
- Copy B: Employee use
- Copy C:
If you are completing this process without a software program or tax professional, take your time to ensure that all the information on all four copies is correct. Then the forms are ready to be distributed.
Prepare for Future Tax Seasons
Just as you would with a W2, you want to collect all necessary information and ensure it is accurate before you begin filing the 1099. The following list can be utilized to ensure you have what you need.
● Accurate and updated W-9 form
● Valid tax ID number or social security number for non-employee
● Employer information: employer ID number and address
● Total amount paid during the tax year
● Total backup holding, if applicable
Once you have collected all the necessary information, you can begin filing the 1099. If you are not utilizing a software program or tax professional, be sure to carefully enter the information as each box specifies. It's also important to note that when mailing a 1099 to the IRS, it must be accompanied with a 1096 form. A copy must also be distributed to the non-employee, and one must be kept on file for your business.
I recommend Track1099 tp prepare your 1099 forms. This software integrates with Quickbooks Online (QBO). Most small businesses use QBO to prepare 1099 forms, however, with QBO you can not make changes after a form is filed. Using Track1099, you can change the payee name, address, EIN # and amount using E-file.
Understanding Your Business
Being a business owner comes with much responsibility. A
seemingly small mistake or improper understanding of IRS related
classifications can lead to major legal and financial repercussions. It's
critical to fully understand your business operation and how it applies to