Which Form to Report Income—W-2 or a 1099-MISC?
Are you paying an employee or an independent contractor?
Employers must submit annual wage reports to workers and file these reports with the Internal Revenue Service (IRS) as well. These statements detail income for employees and independent contractors for tax purposes so workers can accurately file their income tax returns.
But which wage reports do you give to which workers? First, you must determine whether someone who works for your company is an employee or a non-employee, then you'll know which report form to give that person.
Who Receives a W-2 and Who Receives a 1099-MISC
W-2 forms are given to employees. This form includes information for the tax year about:
- Taxable income for the employee and how much federal income tax has been withheld from the employee's paycheck.
- Social Security and Medicare income and FICA taxes (on this Social Security and Medicare income) withheld from the employee's paycheck.
- State income and state income taxes withheld from the employee's paycheck.
Form 1099-MISC is given to individuals and business working for your business who are not employees, but only if you have paid them $600 or more during the tax year. The form includes the total payments you have made to this person. It may include backup withholding if that is required. Normally, no income tax or self-employment tax (for Social Security/Medicare) is withheld from these workers, so it's not shown on the 1099-MISC form.
The type of worker who usually receives a 1099-MISC form is broad. It's most likely one of these categories:
- independent professionals like IT people, accountants, or attorneys; and
- trade workers, like plumbers or maintenance/janitorial services.
The 1099-MISC must be given to an individual person or a business (like a limited liability company (LLC). But corporations, including S corporations, usually do not receive a 1099-MISC.
This article on who must receive a 1099-MISC might be helpful to you in sorting out who to give this form to.
How the IRS Classifies Workers
Still confused about what form to give workers? It's pretty clear that someone working for you who has a business name, like "Sam's Cleaning Service" gets a 1099-MISC form. But what about a worker who is within your business who doesn't have a separate business name?
Here's a quick run-down of the major differences between employees and independent contractors.
The IRS uses three general criteria to determine whether an individual is an employee or an independent contractor: behavioral control, financial control, and the relationship between the worker and employer.
Does the company control what the worker does and how, when, and where the worker does it? If so, this is behavioral control.
Think of it like hiring someone to create a website for your business. Yes, you're telling him what you want to be done, preferably outlining the job in a contract, but she's a professional and she will use her creativity and knowledge of internet protocols to come up with a website.
You don't control when that independent contractor works on creating your website. She doesn't report to your place of business at hours you specify. You can't tell him to stop working on the website for a while and report to a shorthanded department to help out there.
Financial control applies to how the individual is paid. Yes, you might have a contract that details how much you'll compensate the independent contractor for building that website for you. You may have a contract that you both have agreed to. The contract will most likely state when your payments to her are due.
If the worker is an employee, it's up to you as the employer when the worker is paid and how much she is paid. You have financial control over the work he does for you.
Important: The existence of a contract doesn't guarantee that the IRS will look at a worker as an independent contractor.
Your Relationship With the Worker
Are there any employee-type benefits involved in your relationship with the worker? Think pension plans, insurance, and vacation pay. This indicates he's an employee.
Is the relationship open-ended or does he have a contract with you that specifies that it ends when a certain job is completed? Is the work that's performed a key aspect of your business? All these factors determine the type of relationship you have with the worker.
Contract workers don't have benefits and the length of the relationship is decided by you both, with each side having the right
What Else Do I Need to Know about W-2 forms and 1099-MISC forms?
W-2 forms are due to the employee no later than January 31 of the year after the tax year. The forms must also be sent to the Social Security Administration by this January 31 date.
You must send an independent contractor a 1099-MISC if you paid him $600 or more during the year. You don't report withholding, Social Security, or Medicare wages on a 1099-MISC because you don't withhold income taxes for independent contractors.
Collect all 1099-MISC forms and send them to the IRS with a 1096 compilation form, just as you did with the W-3 form that went to the Social Security Administration for your employees.