When it comes to paying a worker with exchange to the services that they give, it is really important for the business owner to know the difference between a Form 1099-MISC and a Form W-2 wherein both have critical differences with each other and both have differences when it comes to calculations.
One thing that every business owner must take note is that a Form W-2 is only issued to employees at the end of the year. By January 31 of the following year, it is really important for business owners to remember that an employee must already receive the Form W-2. It contains critical payroll information that each employee needs to file his/her personal income tax return, such as gross wages, salaries and other forms of compensation; federal income tax withholdings; Social Security tax withholdings; Medicare tax withholdings; state and/or local income tax withholdings; retirement plan contributions, such as payments into the employee’s 401(k) plan or other employer sponsored plan; and other employee benefit information.
A Form W-2 in indeed very important most especially when an employee prepares a federal or state personal income tax return. Definitely, an employee must do a lot of errands upon receiving the Form W-2, making it for the business owner to prepare it in a timely manner. Every employee definitely wants to receive the most awaited tax refund check, that is why they all get excited upon receiving the Form W-2 because it finally enable them to file their tax return.
Form 1099-MISC must also be issued to recipients by January 31, but this form is given to independent contractors rather than employees. Another difference of the Form W-2 and the Form 1099-MISC is not only of the recipient, which is between an employee and an individual contractor, but also because the Form W-2 is being issued to every employee no matter how much wages they receive. Even if an employee worked only a few hours and made just $50, you must still give him a W-2. In contrast, a Form 1099-MISC is only required if the recipient received $600 or more in non-employee compensation during the year.
Another thing that every business owner must keep in mind is that, when it comes to issuance of Form 1099-MISC to an independent contractor, it has been known that there is only one dollar amount of the total annual payments made to that specific individual. You should not have withheld any taxes from those payments. Specifically speaking, an individual contractor is a self-employed individual who is liable of solving for her or his taxes.