Do you know the difference between a 1099 and a W-2?
This question is one of the most common in our office especially during the tax season. Many, if not all, belong to a certain category: wage earners or self-employed workers. These two categories are totally different even in the payment of taxes.
A salaried employee works hours set by the company and receives a W-2 at the end of the year. This form lists all of the income you earned from your employer during the tax year, and includes deductions from state and federal income taxes. Receiving a W2 means that you have already paid your taxes on this income If you are a self-employed worker – an independent contractor, real estate agent etc. – you chose your own schedule and probably you will receive a 1099 form at the end of the year, which details the income you earned from a specific customer during that year. This form includes income without tax deductions. The companies for which you work are required to have you fill out the W9 form before sending you a 1099 form by January 31 of each year. If you do not receive this form, it may be for two reasons: you made less than $ 600 during that fiscal year, or simply the client did not want to report it. Regardless of whether your client decides to report it or not, you must report all your income to the Internal Revenue Service (IRS).
One advantage of being a salaried employee is that when the tax season arrives you have fulfilled your part of paying taxes to the government and you are likely to get some of the money you paid back. Unlike an employee who receives a 1099 which will have to pay taxes on the total income received during that year. However one of the advantages that an independent worker has compared to a person receiving a W2 is the deductions. Some of the deductions you can include in your taxes vary depending on the type of work you do but the most common are: income, gas, supplies for the business, wages, and car repairs among others.
You should be aware that any form you choose to pay your employees must comply with the parameters set by the IRS. The Internal Revenue Service has established specific guidelines to define who is a W2 employee and who is an independent contractor, as many companies are listing their employees as independent contractors when they are not. There are cases in which a worker can be both an employee and an independent worker. In both cases you must meet the obligations to submit your taxes at the end of the year.