1099 vs. W-2 forms: What’s the difference?
Human resources and benefits teams have a laundry list of responsibilities. Among these obligations is the completion of crucial documents on a regular basis for local, state and federal government purposes. This year, much of the news regarding important forms has had ties to the Affordable Care Act. To understand what documentation is necessary for that function, companies need to be aware of what defines an employee. To file forms 1094 and 1095 accurately for small and large employers, businesses also need a correct count of different types of workers.
In addition to completing ACA documentation, organizations and their HR leaders need to finish and distribute either W-2 or 1099 forms to their employees. Let’s take a look at the difference between the two records:
The W-2: Reserved for regular employees
When businesses hire people for specific jobs within their company, they’re usually bringing on actual employees. These people only work for one organization, are given training for their role and perform tasks dictated by their employer and its leadership, according to the U.S. Small Business Administration.
As these workers fall under what’s considered the normal definition of an employee, companies are required to file a Form W-2 for each person from whom income, social security or Medicare taxes are withheld, the IRS said. To ensure these documents are accurate, employers should verify their employees’ Social Security numbers are correct within their records. In addition to companies completing this document for their own tax purposes, employers must distribute copies of this form for workers to finish for individual tax preparation. The deadline for sharing the form is usually January 31 following the close of the tax year.
The 1099: Defining independent contractors
While hiring employees may be more common, companies also have the choice to bring independent contractors on board to help with specific responsibilities. Since these workers fall under a different classification than a salaried employee, businesses must complete a separate form to document their duties.
It’s critical for organizations and their HR teams to understand the definition of an independent contractor. This title is reserved for people whose method of completing a job cannot be directed or controlled by the payer. The employer can only share the intended or desired result of the work, according to the IRS. Those people who meet the independent contractor guidelines are considered self-employed. This means they are responsible for completing their own tax withholding obligations instead of automatic withholding reserved for regular employees.
Employers who hire independent contractors are required to complete and distribute form 1099 for company and individual tax purposes.
Form SS-8: Trouble with classification
It’s crucial for employers to be able to distinguish between independent contractors and employees. While the IRS outlines definitions for each, companies may still encounter difficulty understanding these guidelines. In cases where businesses have trouble accurately classifying their workers, the government gives organizations the opportunity to receive federal assistance.
If classification is still unclear after reviewing the definitions, companies can complete Form SS-8, or Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. A determination can take up to six months to receive, so whoever files the document – both employers and workers are eligible to finish and submit the form – should take that time period into consideration, especially in regards to tax completion.
Classifying people incorrectly can have negative consequences for companies and their HR teams. Since independent contractors are not obligated to receive benefits under their employer, businesses may have to repay the cost of these perks if it’s discovered they mislabeled a worker. It’s crucial for organizations to understand the differences between the two definitions to accurately document the work they receive and are paying for.
Companies that find this process too overwhelming have the option to work with a third-party provider. These partners can ensure the right workers receive the appropriate forms and complete the business’s portion of the responsibility correctly and efficiently.