Wednesday, January 16, 2013

What is the Difference Between Forms W-2 and 1099?

With tax season looming around the corner, Robert W. Wood explains the differences between IRS Form 1099 and IRS Form W-2 in his article on 1099 or W-2? Giving or Receiving, Be Careful:
Both key tax forms arrive in January or February, so watch your snail mail. If you’re an employee, taxes must be withheld. You’ll receive an IRS Form W-2 from your employer in January the following year. If you’re an independent contractor, you are liable for your own taxes. Assuming your total pay was $600 or more, you’ll receive an IRS Form 1099.

But is it that simple? What if you’re the employer rather than the recipient? This key decision is made thousands of times daily all over America, often, it seems, without much thought. Some employers ask “1099 or W-2?” as if they were asking how you take your coffee.
If you’re the worker, you may be tempted to say “1099,” figuring you’ll get a bigger check that way. Of course, you’ll actually owe higher taxes. As an independent contractor, you’ll owe not only income tax, but self-employment tax too.  In contrast, if you’re an employee, you pay only one half the Social Security tax, plus one half the Medicare rate. Your employer pays the other half.

Apart from tax law, employee status carries protection under nondiscrimination laws, pension and benefits laws. Wage and hour protections apply to employees but not to independent contractors. For all of these reasons, employers have considerable incentives to try to pay independent contractors rather than employees. This can often be done in ways that are perfectly proper.
See Robert W. Wood, 1099 or W-2? Giving or Receiving, Be Careful:, January 25, 2013.

QUICK TIP: has a handy online tool, which can be found here, that compares the different effective 'take-home pay' of equally compensated W-2 and 1099 employees.

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