What Are W2s & 1099s?
The W-2 and the 1099 are known as information return tax documents, and businesses must file them to the Internal Revenue Service and other state tax boards. Companies must file one of the various information returns if they have employees with reportable income during the year. Persons who file an information tax return must also provide statements of that income.
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W-2
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A W-2 is the form used by an employer, who pays for services performed by an employee, when income, Social Security, or Medicare tax is withheld. Payments may include non-cash payments, and income is withheld when an employee does not claim an exemption from withholding. Withholding tax is income tax taken from an employee's wages and paid to the government directly from the employer. W-2 forms are mailed to an employee by January 31 in order for the employee to file income taxes.
1099-MISC
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A "1099" is the common term for the 1099-MISC, which is filed for independent contractors. A 1099-MISC is filed for for people and businesses who are not treated as employees. These independent contractors must earn more than $600 a calendar year in order to receive a 1099-MISC. Other income such as royalties, prizes, fishing boat crew member wages, attorney's fees and payments over $600 to physicians from health insurance providers should also be reported with a 1099-MISC. The 1099-Misc is due to the independent contractor by January 31 and to the IRS by February 28.
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History of Income Tax
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Income tax was officially introduced by the 16th Amendment on February 3, 1913. The 1040 form was introduced in 1913. In 1974, Congress passed the Employee Retirement and Income Security Act, which gave the IRS regulatory responsibility for employee benefits. The taxes withheld by the IRS from the W-2 form goes to the Social Security Administration to determine employee eligibility for benefits such as retirement or disability. Workers who receive a 1099-MISC would pay taxes to Social Security on their annual income tax forms, unlike employees who receive a W-2.
Misuse of W-2 and 1099 Forms
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Media organizations such as the New York Times have reported that more companies are cutting costs by misclassifying regular employees as independent contractors. Employers avoid paying Social Security, Medicare and unemployment insurance taxes when filing a 1099-MISC to an independent contractors rather than a W-2 for a regular worker. In 2010, the Labor Department estimated that more than 30 percent of companies misclassify employees as independent contractors when they should be regular W-2 earning employees. In 2010, Ohio estimated a loss of approximately $223 million in income tax revenue from misclassification of employees.
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References
Resources
- Photo Credit tax forms image by Chad McDermott from Fotolia.com
