Having just reached the start of November, tax season may still be the furthest thing from your mind. The truth is, it shouldn’t be. As a small business owner, taxes and specifically, the forms associated with them, are crucial to have on your radar all year long.
Equally as important is having a comprehensive understanding of each of the forms required by the IRS. Miss something or improperly complete these forms and you could face a tax error or even a potential fine.
The most easily confused? W-2s and 1099s. While you may think you know how to differentiate the two, a mistake here could cost you.
W-2 vs. 1099: How to Know the Difference
Differentiating between a W-2 and a 1099 first starts with classifying your workers as either employees or independent contractors. Both work for you, but their status to the government makes a big difference in how the IRS looks at them. This breakdown should help clarify:
An employee is someone a business has hired and pays either hourly or on a salary. They perform work in a manner dictated by the business owner.
These people are taxed based on the income you pay them, which they see on their annual W-2. The W-2 reports their wages, tips and other compensation, as well as their withholdings.
As their employer, the business needs to withhold federal and state income taxes, as well as Social Security and Medicare, or FICA, taxes. Plus, the business also must make those FICA payments.
This person still works for the business, so aren’t they considered employees? No.
An independent contractor controls the manner in which they perform the task a business has given them. All a business has to do is give an independent contractor a W-9, which gets you their name and Tax ID, so you can issue a 1099-MISC.
1099-MISCs are issued for non-employees when compensation reaches above $600. These self-employed contractors are responsible for 100 percent of their taxes, so that’s not your worry.
But, don’t be late! Get their W-9 as soon as you hire the contractor. If it’s late to the IRS or incorrect, that’s a $100 fine on you, not the contractor. The worst part? The $100 fine compounds each month past the January 31, 2018 deadline. If the contractor doesn’t return it, don’t be afraid to ask them multiple times, and if it’s still an issue, maybe it’s time to move on.
WageFiling has helped thousands of small businesses prepare and file W-2 and 1099 forms since 1996 and this year is no different. The company is an IRS Quality Supplier, used by many major corporations and has been featured in Entrepreneur Magazine, Morningstar and Fox Business.
If you’re looking to take the stress out of tax season and keep your focus on the business, we’re here to help. Click here to join our mailing list. We’ll send you important filing updates you need to know about to make sure you’re prepared for tax time.