Recently, a lot of people have been 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 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 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 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 1099, taxes aren’t automatically withheld by the payer. When paying taxes, that payer may be expected to come up with a year’s worth of tax money.
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 the hour
Example of Industries That Typically Use a W-2
- Staffing agency employees
- Part-time workers
- Full-time employees
We hope that clears this confusing issue about if you’re using a W-2 or a 1099 tax form!
Check out more staffing agency information: