The United States recognized multiple methods of employment, but the average person will only encounter two standard structures. You can earn wages by being an employee or as an independent contractor.
These classifications will determine if the company issues a 1099-MISC at the end of the year to report your income or sends you a W-2 form.
If you work multiple jobs, then you might receive both forms at the beginning of the tax filing window. Independent contractors may collect numerous 1099-MISC documents if they provide services to multiple entities that pay a high enough of an income.
Differences Between Independent Contractors and Employees
If you work as an independent contractor, then the government classifies your activities under self-employment. You get to set your own hours and use your tools for multiple businesses, but no one withholds taxes from your earnings.
You become responsible for the benefits received and taxes you pay.
Employees receive a hiring contract that withholds taxes from earned wages. Businesses pay employment taxes on workers, train them, and usually offer benefits. That means the company has more control over when you work and what your duties are each day.
The 1099-MISC and W-2 are tax forms that represent these two structures.
When Would I Receive a 1099-MISC?
The IRS has three categories it reviews to determine how much independence workers have while completing their job duties.
Behavioral Categories
Do you have the right to control how you complete your work? If an employer can dictate when, where, and how to do a job, then it might qualify as employment instead of independent contracting.
Financial Categories
Are the business aspects of your job controlled by the company? This area might include how expenses receive reimbursement, who is responsible for supplies, or how you receive a paycheck.
Relationship Categories
Is there a written contract that governs your working relationship? If your job is considered permanent and employee-type benefits are part of the compensation package, then you might need to receive a W-2 instead of a 1099-MISC
What makes this process challenging is that there isn’t a specific formula that the IRS follows in this matter. You must look at the entire relationship and consider the degree to which your employer directs how you work.
Rules Governing 1099-MISC and W-2 Forms
The 1099-MISC tax form reports payments made to you as an independent contractor over the past year. You would receive this form if you earned at least $600 or $10 in royalties or certain broker payments.
What makes the 1099-MISC confusing is that entities who are not an employer must also send this tax form to you under specific circumstances. If you received a prize of more than $600, crop insurance proceeds, or rents, then you’ll get this document. Anyone who must send you this tax document should mail it by January 31 of the following year.
If you made payments to someone of $600 or more for services rendered, then you might also be required to send a 1099-MISC to report that activity.
A W-2 tax form reports the annual compensation that you receive as a worker. It will tell the IRS how much the company withheld in payroll taxes for the year. If you receive this document, then you receive a paycheck from your employer’s payroll.
This form must also be mailed to you by January 31 of the following calendar year when payment was received.
Unlike the 1099-MISC tax form, there are no minimums in place for the W-2. If you are an employee, you will receive this statement no matter how low your earnings were for the year.
Are You Ready for Tax Season?
Filing your taxes each year can be a frustrating experience. Even if you have the help of preparation software, knowing the rules of the 1099-MISC and W-2 documents is necessary to meet your obligations.
If you make a mistake when filing your taxes, there might not be a second chance. You could find yourself paying penalty charges, interest, or even fines if you were supposed to send out specific tax forms to vendors and didn’t get the job done.
Timing is crucial when considering your responsibilities with the 1099-MISC and W-2. The form requirements can be confusing and frustrating, causing some businesses and entrepreneurs to give up and not file anything. Others might guess at the rules they must follow.
Your tax situation doesn’t need to become complicated. If you have any questions about these documents, then talk to our team about the professional tax help you require to simplify your situation.