Recently, lot of people are confused about the difference between a W-2 and a 1099 form and why it’s so important. Today we break it down for you!
What is a W-2?
W-2 is more detailed than a 1099. The reason for that is employers withhold deductions throughout the year from employee income and those deductions are on the W-2. These deductions include federal, state, and local income taxes, Medicare tax, Social Security tax, and any employee-paid amounts for insurance and retirement. All of this information on the W-2 is submitted when an employee files a tax return. All wage information on a W-2 is reported to the Social Security and the IRS.
What is a 1099?
The 1099 form is used by independent contractors or freelancers, but not by employees or company contractors. In an independent contractor arrangement, the employer doesn’t withhold taxes either quarterly or annually and the 10099 only includes the amount paid to the contractor during the tax year. The IRS requires companies to send 1099 forms when they pay $6000 or more in rent or compensation to a contractor, or $10 or more in gross royalties. A copy of the 1099 is sent to the IRS. Independent contractors are responsible for their own self-employment tax. As a freelancer, you’re responsible for your own self-employment tax and paying estimated earnings taxes to the IRS.
Differences Made Simple
- With a 1099, taxes aren’t automatically withheld by the payer.
Examples of Industries that Typically Use 1099:
- Talent Agent
- Private Investigator
- Personal Trainer
- Real Estate Agent
- Snow Removal
- “Gig Industries”, such as taxi drivers or those working independently such as DoorDash, Fiverr, and others who decide their own hours and paid based on each success instead of by hour
Example of Industries That Typically Use a W-2
- Staffing agency employees
- Part-time workers
- Full time employees