The W2 and the 1099 are two different types of tax forms that report your income to the IRS. Both employers and employees should know the difference and know which one to expect at the end of the year as they have very different outcomes for your tax return.
If you don’t know which form you have or what the difference is, read on to find out the important differences in these documents and which one is best for you.
One Easy Trick
There is a very easy way to tell whether you are receiving a W2 or a 1099.
If your employer is taking tax out of each check, then you have a W2. Your check stubs should show how much tax is going to Federal Income Tax, how much is going to Social Security and how much is going to Medicare.
If you are being paid without any tax taken out, chances are you are being paid on a 1099. This means you are an independent contractor and are responsible for paying the tax yourself on the income you receive.
What Does It Mean For Your Taxes?
If you have a W2, the chances are that you can get a tax refund back if your employer is taking out a good amount of tax from your checks. When you file your taxes, your income will determine how much money the IRS wanted you to pay during the year.
If the tax withheld from your checks is more than the amount of tax due for your income, then you will receive any overpayment of tax back in the form of a refund.
If you are working on a 1099, you will want to compile all of your expenses related to your work throughout the year and set some money aside to go toward your taxes (between 10-25%).
When you go to file, you will be able to deduct your business expenses from your income to reduce your tax liability. You are not able to get a refund from a 1099 form unless you qualify for a separate credit such as the Earned Income Credit or the American Opportunity Tax Credit.
For Employers: Which is Better?
If you own a business and want to hire employees, the decision of how to run payroll in paramount. There are pros and cons to each kind of pay and with the information below you can decide which is best for you and your employees.
When you hire an employee on W2, you are responsible for paying a company’s share of taxes as well as making sure tax is withheld from your employees checks in the correct amount. You will also need to pay things such as Unemployment Tax and taxes for form 941 each quarter.
It seems very difficult, but luckily there are firms like ours who can manage payroll for you and make it all seamless. This style of paying your employees is the most rewarding for your employees, especially if you know they will be staying around for a long time.
When you pay an employee on 1099, the burden is shifted onto the employee who is classified as an independent contractor. If you work in a field where you have to consistently hire and fire employees for each different job, it can be a good idea to issue them 1099s rather than onboard them for a W2.
Keep in mind with this form of pay that the employees will be considered independent contractors and are able to discount their expenses and set aside money for their own tax.
Contact Us
For any questions related to taxes or payroll, our experts are ready to help and able to provide you with all the services your business needs. We can guide you to the correct decision for your particular business and help make it happen with our bookkeeping and payroll services.
Reach out to us to schedule a consultation and set up your bookkeeping and payroll for an affordable price today!
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