Key Differences Between a W-2 and a 1099

As another tax season approaches, you might be wondering about the various responsibilities that await your small business. From deciding what deductions are valid to determining what forms to fill out, the stress level is often high for those who run their own companies.

Fortunately, Accurants is here to help. Here are some of the key differences between W-2 and 1099 forms to help you on your tax journey.

What Is a W-2?

Forms sent by employers to both employees and the IRS, W-2s report federal and state taxes withheld throughout the year. Additionally, these forms make note of tax money withheld for Social Security, Medicare and also any benefits such as insurance provided by the employer. As a business owner, you are required to send W-2 forms to any workers in your employ prior to Jan. 31, assuming that taxes are taken out of their checks.

Not sure if your employees are W-2 or 1099 workers? The following qualify an employee to receive a W-2:

•  Hours are set by the company
• Training is provided by the company
• Tools and equipment are provided by the company
• The company is the worker’s single employer

What Is a 1099?

Not all American workers receive W-2 forms. If you pay your independent contractors/freelancers without deducting money for federal and state taxes, you will likely need to send 1099 forms at the end of the year.  These forms are most common among independent contractors and freelance workers who might have multiple clients.

As a small business owner, you are responsible for reporting your employees’ income as well as the money made by your business over the course of the year. The IRS has been paying special attention to SMBs and their employees in recent years, so it’s important to report this information accurately and on time.  The IRS taxes independent contractors as a self-employed individual.

Here are some signs you need to send your worker a 1099 instead of a W-2:

•  Worker sets his or her own hours
• Worker provides any needed tools and supplies
• Workers provide services to multiple clients

It’s important to note that companies are only required to send 1099s to independent contractors who earn $600 or more in a given tax year. However, independent contractors are still responsible for submitting their total earnings to the IRS.  Neglecting to do so can leave you, your family, or your business open to penalties and audits.

Small business owners are often confused or are misinformed about how they should classify the worker(s) they are planning to hire. Whether you plan to bring them on as W-2 or independent contractors, note that misclassifying a worker can create tax-liabilities, fine and penalties for your business.  The key criteria that the IRS uses to determine whether a worker is classified as an independent contractor or W-2 employee, is “control”.  The IRS breaks “control” into the following 3 categories:

1.  Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether the expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

You can find additional IRS resources about the differences between W-2 and 1099 forms online.

Contact Accurants Today

Accurants is a complete small business management software suite. It keeps track of vendors that are eligible to receive 1099 and show the list of vendors that qualify so that you as a business owner know how many 1099s you will have to send out.

These days, many small business owners struggle to accomplish all the tasks they need to achieve in a single day. From cloud-based invoicing to help with your accounting, time-tracking assistance to payroll, Accurants does it all.  Our goal is to minimize the time you spend on bookkeeping, so you have more hours in the day to devote to your business.

Find out more about what Accurants can do for you or register to try our services free for 30 days.  We look forward to helping make your business a success.