When to File a Form W-2 vs 1099 for the 2021 Tax Year
It may feel like just yesterday you were sitting down to file your year-end forms. Well, surprise, it’s that time again!
Determining which of your staff members are employees and which are independent contractors can be easier said than done. If you are unclear about the difference between Form W-2 and Form 1099-NEC for the 2021 tax year, here is a quick refresher!
What is a Form W-2?
Form W-2 is a wage form used to report the wages an employee earned from their employer during the year with a breakdown of the taxes withheld. Employees need a copy of Form W-2 to file their own state and federal income taxes.
Who Must File Form W-2?
All employers that pay wages to their employees, even if the employee is a relative, are required to file Form W-2 with the Social Security Agency (SSA) on their behalf each year.
This form is used to report the wages and withholding to the IRS. A copy must also be furnished to employees. Without the wage information on Form W-2, they are unable to accurately file their own personal income tax returns with the IRS.
What is a Form 1099-NEC?
This is an IRS tax form that is required by the IRS for reporting nonemployee compensation. Non-employee compensation is defined as any payments made to independent contractors, freelancers, or any other non-employee that is performing services for the business.
As you may know, nonemployee compensation has been reported in box 7 of Form 1099- MISC in the past. This created some confusion because the deadline to report nonemployee compensation is different from the deadlines to report other miscellaneous income. The IRS released Form 1099-NEC in order to clear up any confusion. All non-employee compensation should be reported on IRS Form 1099-NEC beginning in the 2020 tax year.
Who is Required to File Form 1099-NEC?
If you have made a payment of $600 or more to any person or business organization that isn’t included on your payroll, you are required to file Form 1099-NEC.
What’s the difference between a 1099 Contractor and a W-2 Employee?
You should complete and file a Form W-2 for everyone that is on your payroll. If they are receiving regular payroll payments from you and you are withholding taxes they are most likely an employee. Other key indicators of an employee are that you provide the training and tools they need to do their job and their job has no set time limit.
Independent contractors on the other hand are not making regular appearances on your payroll. They are hired to do work that is within a set time frame. These are also workers that you don’t withhold taxes from and they aren’t offered benefits.
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