The W2 and Form 1099 serve the same purpose – they are official reports of your income earned from sources throughout the past year, but each is issued depending on different circumstances.
It is important to know if your employer will give you a W2 or 1099 form at the end of the tax year because it requires a slightly different approach to how you will file.
Form W2 vs. Form 1099-MISC
The IRS has different definitions for what constitutes a W2 worker as opposed to an independent contractor, or 1099 earner.
Form W2: The wage and tax statement is issued to employees when an individual performs services that are controlled by the employer, and the employer is responsible for determining what work needs to get done, and how it is completed. W2 earners get Social Security and Medicare deducted from each paycheck.
Form 1099-MISC: The form is reserved for miscellaneous income that is paid to non-employers, like independent contractors. The IRS defines an independent contractor as someone that has the right to control how the work will be performed and the methods needed to complete it. Independent contractors are treated as self-employed individuals meaning they are also subjected to self-employment tax. As a result, Social Security and Medicare is not taken out of each paycheck and instead must get deducted in quarterly taxes or at the end of the year.
What gets reported to the IRS?
The W2 form will not only report wages, tips and other compensation received from an employer, but it will also notify Uncle Sam about how much of the income contributed to Social Security and Medicare. Form 1099, meanwhile, is only directed for non-employees that report payments of $10 or more in gross royalties, or $600 or more in rent or compensation. It has nothing to report about taxes withheld because none are deducted. The non-employee receives a gross income.
Know Your Responsibilities
The IRS requires employers to record your salary and tax information. They must report it and then send you a W2 form that is postmarked by January 31, following the previous tax year.
You should always double check your W2 and make sure it is correct. Do not just assume the employer reported it correctly. Sometimes basic accounting typos can lead to a major calculation flaw. The wrong personal information can cause a delay in receiving a refund. So double check the W2 or 1099 to make sure the information reported is accurate.
If something is off you can contact the employer directly to get clarification, as well as have a corrected W2 or 1099 sent back out. If the employer is insisting the information is correct yet not adding up to what you have documented about earnings, you may want to consult a tax professional for advice.
Dealing with 1099s
The Form 1099-MISC adds a little more complication to the tax process because Social Security and Medicare is not withheld from the initial earnings. Additionally, freelancers often receive multiple 1099 forms because they have various clients. Any client of yours that pays you more than $600 in a year must send you a 1099.
The 1099 will not show you taxes withheld (because generally there are none) only the reported income you earned through the client. Some self-employed individuals also receive variations of a 1099, like the 1099-K form.
Calculating the Adjusted Gross Income (AGI)
The adjusted gross income, or AGI, is a number that is calculated after you receive a W2 or 1099. It is difficult to correctly calculate the AGI without either one of these forms.
For workers that receive multiple 1099 forms, all you need to do is add the earnings of all the 1099s together in order to calculate a total income and AGI. In addition to factoring an AGI, independent contractors will also need to estimate self-employment tax and take advantage of any qualified deductions.
Get Assistance With Your Taxes
When it comes time to handle W2 forms and/or 1099s it is always nice to have the advice and support of a professional. Form 1099 is a little more complicated, especially when it comes to dealing with multiple ones. Then you need to consider various self-employed deductions so you do not get caught up in paying the IRS way more than you deserve.It is important to make sure your taxes get done correctly in order to make sure you get the right refund, or do not pay the IRS more than they deserve. We provide an initial consultation free of charge. Contact us at 800-TAX-LEVY, or www.levytaxhelp.com.