LANSING – You will deal with two various tax forms when recruiting employees: 1099s and W-2s. When you hire an independent contractor, you must file a 1099 form to report payments, and employees who had payroll taxes deducted from their compensation must file a W-2 form.
1099 vs. W-2 Workers
Regarding taxes and IRS requirements, there are differences between 1099 and W-2 employees. Workers (W-2 employees) typically enjoy amenities like benefits packages, paid time off, and a fixed income. While independent contractors (1099 workers) typically have to fund their own health insurance and retirement expenses.
What is a W-2?
Every employee who works for your company receives the W-2 tax form, commonly known as the Wage and Tax Statement, at the start of the year. A W-2 summarizes all of your employees’ tax deductions and provides information about the withholding they received throughout the year. The data is used by the employee to assess whether they are eligible for a tax refund for an overpayment or whether they still owe the IRS money.
What to Know About W-2s
When an employee is employed or wants to adjust their withholding amounts, they must file a W-4, which is commonly confused with a W-2. if you have paid a worker more than $600 in the previous year. You are required to complete and send this document to all employees by January 31st.
The point of a W-2 is to report important information to the employee, federal government, and the state revenue service including:
- Total income subject to taxation: This is the employee’s wages for the year after pretax deductions. This is what the IRS uses to determine the employee’s tax bracket and total taxes owed on their income.
- FICA and Medicare withholding: Social Security and Medicare aren’t technically taxes since they are payments into services employees receive later in life. They’re withheld separately from federal and state taxes based on each employee’s taxable income.
- Federal tax withholding: This is the amount of money a business withholds from an employee’s pay for the purpose of paying their federal taxes.
- State tax withholding: If an employer has employees who reside in a state that charges an income tax, state taxes are withheld in a similar fashion to federal tax withholding.
- Local tax withholding: In rare cases, employees may reside in a city that enforces a local income tax. If this is the case, taxes might be withheld from an employee’s check for local taxes.
Employers are responsible for sending as many copies of W-2 forms as necessary for both federal and state and local tax filing. It is possible to do this both physically and digitally. In order to comply with federal income tax law, a copy of the W-2 should be filed with the IRS, and a W-3 should be preserved for your own records.
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