W-2 and 1099 are tax forms that are both used for filing taxes. The difference is that W-2 form is for employees, and 1099 form is for independent contractors. As the year-endapproaches, people must start about paying their taxes. Employees receive W-2 form their employers showing taxes withheld from your pay. W-2 Employees do not have to worry about paying their taxes. Whereas, theindependent contractor receives his pay in full and is himself liable for paying his tax.
If your colleague wants your help in deciding whether he should work as W-2 Employee or 1099 Independent Contractor, you must suggest him better option keeping in mind pros and cons of both. If your colleague wants ahigher check on his tax payments, then you must advise him to go with 1099 form that is for independent contractors. This form allows you to pay your taxes in your way and might also save additional taxes. However, the colleague must be aware of the fact that if he chooses to be an independent contractor and file his taxes through 1099 form he has to pay an additional tax that is self-employment tax. This way a higher charge has to be paid by the colleague.
On the other hand, if the colleague accepts aW-2 form of employment he would be free of tax tension at year-end since the employer is responsible for filing. All he gets is a tax deducted pay. This might put your colleague atease, but he must know that additional taxes rise in this employment as well such as social security taxes. Some portion of the social security tax would be deducted from the colleague's pay.
From the employer's perspective, it is preferable for employers to hire independent contractors.As, they do not have to pay for benefits that are given to salaried employees such as health insurance, life insurance, contribution plans, bonuses,etc. It is quite easy for the employer to discontinue therelationship with an independent contractor as compared to an employee. Sometimes it is the employee's decision to select whether to become W2 or 1099 and sometimes employer decides.
In the past few years,employers started classifying most of the workers under 1099 as self-employed for their ease and benefit. IRS has now passed rules to classify a worker as an employee or an independent contractor. A significant difference in recognizing the true category is that whether the employer has control over the employee or not. If yes then he is an employee and if not then he is an independent contractor. So be careful in helping your colleague decide whether he must file returns under W2 or under 1099 as penalties may arise if incorrect classification has been made, and taxes are being filed under wrong forms.The degree of liability would ultimately fall on your colleague so help him choose his correct category and file returns according. If he falls under Self-employment, then he must file tax returns under 1099 form, and if he is considered to be an employee, then he must have received aW-2 form by 21st January of each year.
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