There are two forms that employees may receive for their taxes: either a W-2 or a 1099. Each denotes a specific type of employee and comes with pros and cons for the tax preparation year. The following is a brief guide.
An employee who has taxes taken out of their checks will typically receive Form W-2 when tax preparation documents are sent out in January. Employers and employees each pay half of the Social Security tax and Medicare rate set each year.
In addition to taxes, employees who receive a W-2 are protected by certain regulations such as nondiscrimination laws and wage protection. They are eligible for benefits packages and paid time off. Employees might be eligible for overtime pay, which may be a higher rate per hour. Employers provide necessities, such as office supplies and workstations.
Independent contractors and freelancers will receive Form 1099, where full payment is received with no tax deductions. Since 1099 workers are not considered employees, they must have made $600 or more during the year to receive one. Employers are not required to send a 1099 if a contractor or freelancer made less.
1099 workers must pay their own taxes, which includes not only income tax, but also a self-employment tax. They must pay the full amount, whereas a W-2 employee only pays half, with their employer handling the rest.
Many people choose this route because they receive more in their check upfront, but the trade-off is paying higher taxes later. A way to be ready for this expense is to set aside money, so there’s no surprise when it is time to pay what is owed for the tax year.
Despite tax rates, there are benefits for a 1099. First, independent contractors enjoy more flexibility in working hours and location and often set their rates for wages earned. Many employers will pay a higher rate for work done by a 1099 worker versus someone who would receive a W-2. Freelancers and independent contractors must provide their own supplies and equipment, but they can deduct them as business expenses from their returns.
For professional accounting services and tax preparation in Ashtabula, Conneaut, and Geneva, OH, and the surrounding area, trust Demshar Eaton CPA. Since 1978, these certified public accountants have helped individuals and businesses with everything from bookkeeping to questions regarding the IRS. Their helpful advice and expert resources ensure that you have current, accurate information for your tax and accounting needs. Call (440) 992-6622 to speak with a representative or visit them online for a full list of services.