Deciding When to Use A 1099 Instead of W2

There are a few reasons why an employer might give an employee a 1099 instead of W2. But it’s easiest to make this decision when the employer understands the functions of each form. To do so, employers must correctly classify employees and independent contractors. Then, the distinction of providing a 1099 instead of W2 becomes much clearer.

First, a W-2 form is for any employee that is paid $600 or more in wages during that tax year.

In addition to wages, this form shows the Federal, state, and local taxes withheld during that tax year. A W-2 encompasses other types of compensation to or on behalf of the employee and

communicates voluntary deductions made by the employee. This form is used to file tax returns.

 

 

A 1099-MISC form is given to each non-employee who is paid $600 or more for their services. To reiterate: Employers do not give this form to employees. A 1099-MISC form can also report awards, prizes, rents, payments to an attorney, and healthcare payments.

Employers can decide who receives a 1099 instead of W2 by having a basic understanding of the W-2 form and 1099-MISC form. Making this distinction is also easier when the employer knows how to classify employees and independent contractors correctly.

 

How Are Employees and Contractors Paid?

An employee is paid through a company’s payroll system. Employers report and pay employee withholding taxes. Independent contractors are paid through Accounts Payable, and they report their own income and taxes. This category can also include freelancers, sole proprietors, and self-employed individuals.

The difference between employees and independent contractors lies in whether the position falls under the proper “employment relationship.” Legal standards for this definition rely heavily on the amount of control present within the working relationship: how to train an employee, how many hours per week an employee works, what kind of work is done, and where the work is done. Employers have lots of control over employees. Employers only have control over the outcome of the services performed by independent contractors, and control of the working responsibilities typically falls under the independent contractor.

Independent contractors often join an employer’s team for short-term projects, to provide specialized knowledge, or fill in for an employee’s absence. As the gig economy continues to grow and people piece together income from various sources, employers can expect to hire independent contractors more and more often. Knowledge of when to use the 1099-MISC form or the W-2 form will prove beneficial.

 

How Can a Payroll System Help?

 

Employers might file for both employees and independent contractors. This requires distributing both W-2 forms and 1099-MISC forms. Employee misclassification can place the employer under state or federal investigation and elicit lawsuits from misclassified employees or independent contractors. Making sure recipients are correctly classified, like a short-term contractor receiving a 1099 instead of W2, is not the only potential issue a company can face come tax time. It can be difficult to keep forms organized, especially when they distribute multiple forms. Advanced Micro Solutions can make that process easier with the W-2/1099 Software Filer.

Software Solutions from AMS

Our W-2 and 1099 Forms Filer is our only required platform. From there, users pick the services they need. Choose from the tools below to build out your customized accounting software.