Which Form to Report Income - W-2 or a 1099-MISC?
Which Form To Use for Annual Wage Reports
Employers are required to submit annual wage reports to workers, in order to provide the IRS with income for tax purposes, and so the worker can file an income tax return.
But which wage reports do you give to which workers? Once you have figured out whether someone who works for your company is an employee or a non-employee, you can figure out which report form to give that person. This article looks at wage reports employees vs. independent contractors (freelancers).
If you hire statutory employees, check at the end of the article for information about wage reports.
Employees receive W-2 forms. That is the easy statement. Anyone else you pay for work done during the year must receive a 1099-MISC form. The difficulty is in determining whether the workers are employees or not. Most of the non-employees you pay will be considered independent contractors. That is, they have their own business separate from your business.
Before you can determine which form (W-2 or 1099-MISC) to use to report income, you must first determine whether the workers are employees or independent contractors.
Are Workers Employees or Independent Contractors?
The IRS considers workers to be employees unless it can be proven that they are independent contractors. There are three general criteria used by the IRS to make this determination of employee or independent contractor status.
On a case-by-case basis, the IRS considers three general categories : behavioral control, financial control, and relationship between the worker and employer.
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Which Form Should I Use to Report Income - A W-2 or a 1099-MISC?
Now that you know more about whether your workers are categorized correctly, you can proceed to preparing wage and tax reports for these individuals.
Simply stated, employees receive a W-2 form showing their income for the year, while independent contractors receive a 1099-MISC form showing money you paid to them during the year.
To report income for employees of your company, use a Form W-2. This form reports total income, Social Security and Medicare Income, and it shows how much has been withheld from employee pay for federal, state and local taxes. W-2s are due to the employee no later than January 31. After you have completed and sent the W-2s, you must then collect all of the W-2s for your employees and send those, along with a compilation called a W-3, to the Social Security Administration by January 31, 2017, for 2016 taxes.
Independent contractors are those individuals who do work for your company but who are not employees. You must send the individual a 1099-MISC only if you paid that person $600 or more during the year. Of course, even if the person does not receive a 1099-MISC, they must still report all income.
You don't report withholding or Social Security/Medicare wages because you don't withhold income taxes for independent contractors and you don't deduct Social Security and Medicare from their payments. In the same manner as the W-3, you collect all 1099-MISC forms and send them to the IRS with a 1096 compilation form.
UPDATE: The deadline for filing W-2 and W-3 forms and 1099 forms with the Social Security Administration has been changed. For 2017 forms, the filing deadline is January 31, 2018. Details in this article about the 2017 annual payroll tax report deadlines.
Although most non-employees and independent contractors must receive a 1099-MISC for, some do not need these forms. Remember that you don't have to provide the form to anyone you paid less than $600 during the year. That doesn't mean they don't have to report the income; you just don't have to give them the form and submit it to the IRS.
If you are not sure if a non-employee should receive a 1099-MISC form, this article detailing who must receive a 1099-MISC may help you decide.
What Wage Report Form Do Statutory Employees Receive?
Statutory employees are a kind of hybrid between an employee and an independent contractor.
More about Employees vs. Independent Contractors