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Difference between W-2 (Wages) and 1099

 
 
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Category : > Income Tax (Form 1040)
Posted On : Thu Nov 25th,2010

 
A W-2 form is an earned income statement containing a detailed set of information, including your total income (wages, tips, commission) and the amount of federal, state and social security taxes that have been withheld. Your W-2 is the most important document you need for filing your taxes. Working on a 1099 basis actually means that you are working as a true Independent Contractor under the IRS rules. You work on a 1099 basis when you are self employed such as a sole proprietor or as a corporation. Your clients will report the monies they pay you to the IRS on a 1099 form.
 
What is form W-2 (Wages)?
 
A W-2 form is an earned income statement containing a detailed set of information, including your total income (wages, tips, commission) and the amount of federal, state and social security taxes that have been withheld. Your W-2 is the most important document you need for filing your taxes. Your W-2 details the income and taxes paid throughout the year through your employment or wages earned for the year prior. Wages can include your regular hourly or salary income earned, back pay, tips, taxable reimbursements, severance pay, and commissions. This element details all the monies you have earned that are subject to tax. When a person is paid on the form W-2, the employer will automatically withhold and pay all of the necessary employee income taxes which are required by the IRS. The applicable taxes include; Federal Income Tax, State Income Tax, and FICA (Social Security and Medicare). In addition, the employer will pay all of the necessary employer taxes. These taxes shall include: FICA (Social Security and Medicare), FUTA (Federal Unemployment Tax), and SUI (State Unemployment Tax).

In most cases, the employer will provide the equipment and office space you will need. You may be eligible for some or all of the benefits your employer may offer to permanent employees such as medical, life, and disability insurance; pension plans; sick days; paid holidays, etc.
 
What is form 1099(Outside Services or Sub-Contractor)?
 
Working on a 1099 basis actually means that you are working as a true Independent Contractor under the IRS rules. You work on a 1099 basis when you are self employed such as a sole proprietor or as a corporation. Your clients will report the monies they pay you to the IRS on a 1099 form. Your clients will typically contract with you to work on a specific project. You should have a written contract with each client that will outline the work you will perform, the fees or cost the client will pay, and how the client will pay you. You will forward invoices to the client according to the contract terms.

Actual independent contractors are responsible for maintaining all business expenses and income and for making quarterly federal and state income tax payments. In addition to reporting income earned by freelancers and independent contractors, 1099 forms are used to report additional or miscellaneous income, such as prizes, fees and royalties. Working on a 1099 basis actually means that you are working as a true Independent Contractor under the IRS rules. You work on a 1099 basis when you are self employed such as a sole proprietor or as a corporation. Your clients will report the monies they pay you to the IRS on a 1099 form. Your clients will typically contract with you to work on a specific project. You should have a written contract with each client that will outline the work you will perform, the fees and/or cost the client will pay, and how the client will pay you. You will forward invoices to the client according to the contract terms. Actual independent contractors are responsible for maintaining all business expenses and income and for making quarterly federal and state income tax payments. Independent contractors and freelancers can deduct the cost of their supplies, materials and work-related out-of-pocket expenses; expenses that have been reimbursed are not deductible.
 
Difference between W-2 wages and 1099 outside services!
  • You get a W-2 form from an employer who pays payroll taxes. You get a 1099 from someone who paid you, but did not pay taxes on the money you were paid. This means that any income you get on a 1099 must be paid self-employment tax rate.
     
  • For most of us the actual difference between 1099 Independent Contractors and W-2 Employees is clear cut for several reasons. But there are many of us out there that have never encountered it or never even thought to discover and understand their differences. Use the links on this page for additional information.
     
  • W-2 and 1099 forms must be delivered to employees and independent contractors no later than January 31st. W-2 and 1099 forms must be filed with the IRS by employers and clients no later than March 31st (sooner if not filed electronically). Employers and clients who miss the deadline can face penalties of certain amount.
     
  •  Intent of the Parties/Written contracts. In determining the Relationship  between a worker and a company, the IRS considers how the Written contract describes the intent of the parties involved.
     
  • Benefits. If a company grants a worker employee benefits, such as Health insurance or paid vacation time, this is evidence of employee status
     
  • Termination. Traditionally, the terms on which either party could Terminate the relationship played an   important role determining Whether a worker was an independent contractor or an employee.
     
  • Ongoing Relationship. If a business and a worker enter into a Relationship with the understanding that it will be permanent or  Indefinite, this is evidence of an employment relationship.
     
  • Regular Business Activity. If a worker performs activities or Services that are "a key aspect of the regular business of the
 Advantages of 1099 status:
  • The IC has more freedom to negotiate his terms of payment than an employee…. "The IC does not have withholding tax deducted from his pay check...
     
  • An employer must also pay certain required benefits, such as workers Compensation insurance...

Advantages of W-2 status:

Working as an employee (contract or permanent, direct) also has Advantages. Taxes are taken out of each paycheck, and the employer
(For a contractor, the agency) pays the employer’s half of the social Security tax... For many people, this will eliminate the need to hire
An accountant or lawyer to prepare the taxes (although for a family There may be other reasons to use a tax professional).

Conclusion:

Independent contractors are not permanent employees of a company. They can work either as 1099 or W2 contractors. Both types of contractors are paid by the client or agency. The earnings of the 1099 Contractor are reported to the IRS on a 1099 form without the withholding of any taxes (federal, state, social security). However, the earnings of a W2 employee is reported to the IRS and federal and state income tax are withheld. The agency also pays the employer's share of the social security tax for W2 employees.

 W2 Contractor:

Under common law, a worker is an employee (contract, permanent, direct) if the person for whom they work has the right to direct and control the way they work, both as to the final result and as to the details of when, where, and how the work is done.

When a person is paid on the form W-2, the employer withholds and pays all of the necessary employee income taxes as required by the IRS. These taxes include: Federal Income Tax, State Income Tax, and FICA (Social Security and Medicare). There are several advantages to working as a W2 employee including the following:

1.       You are assured a regular income
2.       You may be eligible for valuable benefits.
3.       You are free from the headaches of ensuring that your taxes are paid to the IRS. Taxes are taken out of each paycheck and the employer's half of the social security tax.
 
 
1099 Independent Contractor:

Working as a 1099 Contractor means you are in business for yourself as a sole proprietor or as a corporation. Your clients typically issue you a contract to work on a special project. All money paid to you is paid on an untaxed basis. It is your responsibility to file and pay the appropriate taxes directly to the IRS.
Workers considered independent contractors fill the following roles:
  • Work with multiple clients.
  • Pays his/her own taxes and files the required government forms.
  • Social Security taxes are the sole responsibility of the independent contractor.
  • Obtains his/her own benefits including workers’ compensation, disability, etc. The independent contractor is not entitled to any typical employee benefits from any government agency.
  • Deducts business expenses from his/her income tax.
    are several advantages to working as an Independent Contractor including:
1.       Independent Contractors can offer their services to the general public instead of just one employer.
2.       With multiple clients or customers, the independent contractor is free from control by any one firm.
The independent contractor is free to work the hours they choose, usually also free to work for more than one client at a time

 

  

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Comments (4)
Dave Lynch   wrote on : Thu Dec 27th,2012
This is my first year in the consulting business in which I've had a profit. I was wondering if the 1099 "amount" for my consulting fee only includes the amount sent in a calendar year. If money is not sent till 2013 (e.g. work accomplished in Dec 2012 but money for work accomplished is not received till Feb 2013) - will that be a 2013 "income" vice "2012".
Reply : infotaxsquare.com
 
Dear Dave Lynch:

Thanks for choosing InfoTaxSquare.com for your business needs. If, you have chosen accrual accounting method then it has to be reported for year-2012 and if you have adopted cash accounting method then you can report it when you actually received.

You can also use the following link to read more about our services.

http://infotaxsquare.com/e-book/book-view.php


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Jerry Amico   wrote on : Wed Jul 24th,2013
Are wages earned as a 1099 contractor included in the social security "Taxed Social Security Earnings"? Since we pay the SS tax it seems they should be included but appear to not be included. This is important to determine our SS benefit upon retiring.
Reply : infotaxsquare.com
 
Jerry Amico:

Thanks for choosing InfoTaxSquare.com for your business needs. Yes, 1099 compensation also considered earned income and paid social security taxes shall be considered.

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cynthia   wrote on : Wed Jan 29th,2014
If you are already retired and are contracting through a firm for a 1 time temporary stent is it wise to ask for 1099. I am not sure about them withholding social security monies.
Reply : infotaxsquare.com
 

Issue 1099 or Withhold Taxes on 1099

Dear Cynthia:

Normally, you do not withhold taxes if you are issuing 1099 to the subcontractor. If you are a subcontractor or subcontracting job to someone, make sure you have a written and signed contract along with the paid invoices, otherwise state and federal may declined your claims on your tax returns.


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Tushar Hazra   wrote on : Fri Feb 28th,2014
I'm being a offered a contract temp position to be paid on W-2 with no benefits. I'm not sure if that is possible and if it is, then will I get to deduct my expense to commute to work as I would drive long distances to work and also the cost of lease payment for a fuel efficient new car that would need to get around? The question has two parts: a. Can one be paid without benefits on W-2 ? b. If yes can the person deduct for tax purposes related vehicle expense?
Reply : infotaxsquare.com
 


Deduction of transportation expense

Dear Tushar Hazra,

Thank you so much to choose InfoTaxSquare.com for your business needs.

  • Normally, commuting expenses meaning driving from home to work and back are not deductible.

  • You can claim expenses if you used your car to visit to client and were not reimbursed by the company.


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For instant news please subscribe at www.InfotaxSquare.com


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Reply : infotaxsquare.com
 


Deduction of transportation expense

Dear Tushar Hazra,

Thank you so much to choose InfoTaxSquare.com for your business needs.

  • Normally, commuting expenses meaning driving from home to work and back are not deductible.

  • You can claim expenses if you used your car to visit to client and were not reimbursed by the company.


 


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