With the year-end payroll filing season right around the corner, if you own a small business and are paying people who perform services for you, it is critical that you understand the difference between Form W-2 and Form 1099-MISC.
Form W-2 is issued to employees at the end of the year. You must give each employee this form by January 31 of the following year. It contains critical payroll information that each employee needs to file his/her personal income tax return, such as gross wages, salaries and other forms of compensation; federal income tax withholdings; Social Security tax withholdings; Medicare tax withholdings; state and/or local income tax withholdings; retirement plan contributions, such as payments into the employee's 401(k) plan or other employer sponsored plan; other employee benefit
Without a W-2, an employee cannot properly prepare or file his/her federal or state personal income tax return. So it is extremely important that you prepare this form in a timely manner. Once an employee receives the W-2, he can file his tax return and get his long-awaited tax refund check from the IRS.
Not only must you issue the W-2 to the employee by January 31, but you must also send a copy of the W-2 to the Social Security Administration, along with a special report called Form W-3, by February 28. Form W-3 serves as a summary report, providing totals for the various dollar amounts listed on the W-2's.
Form 1099-MISC must also be issued to recipients by January 31, but this form is given to independent contractors rather than employees. Here's another significant difference between W-2's and 1099's - a W-2 must be issued to every employee regardless of how much wages he/she received. Even if an employee worked only a few hours and made just $50, you must still give him a W-2. In contrast, a Form 1099-MISC is only required if the recipient received $600 or more in non-employee compensation
during the year.
A 1099-MISC that is issued to an independent contractor typically reports only one dollar amount - the total annual payments made to that individual are shown in Box 7. You should not have withheld any taxes from those payments. By definition, an independent contractor is self-employed and is responsible to calculate and pay his own income taxes (both federal and state), as well as his own self-employment taxes (the self-employed person's version of Social Security and Medicare taxes).
The world of year-end payroll reporting is complicated. Obviously, an article of this length can only provide the big picture. If you have questions about whether to issue W-2's or 1099's to your workers, be sure to consult with an experienced tax professional.
Like what you've read? ...Republish it and share great business tips!
Attention: Readers, Publishers, Editors, Bloggers, Media, Webmasters and more...
We believe great content should be read and passed around. After all, knowledge IS power. And good business can become great with the right information at their fingertips.
If you'd like to share any of the insightful articles on BusinessManagementDaily.com, you may republish or syndicate it without charge.
The only thing we ask is that you keep the article exactly as it was written and formatted. You also need to include an attribution statement and link to the article.
" This information is proudly provided by Business Management Daily.com: http://www.businessmanagementdaily.com/29205/do-you-know-the-difference-between-2-and-form-1099 "