Employers and employees can get confused by the complex tax system in the United States. There are two tiers of taxation in this country , federal, and state. The calculations for each are different. The tax calculations are also different for each state, which adds to the confusion. The different tax forms that are required for workers, depending on their employment relationship with an organization, adds another layer of complexity.
The Form W-9 and the Form W-2 are two forms that look similar but are very different. This article will compare Form W-2 and Form W-9, as well as their tax implications to help you decide which one you should file.
Understanding Forms W-2 and W-9
The employee’s contract with their employer will determine the tax forms and process. The appropriate tax forms must be filed for employees based on these factors.
What is Form W-2?
In the U.S., every employer has tax obligations. This includes creating tax forms. This includes Form W-2. The employer generates this form and sends it to the employee by January 31st. This form contains information about the amount of income tax withheld from an employee’s paycheck. This form also contains information about other payroll taxes withheld, such as Social Security Tax or Medicare. This form is used by employees to prepare and file their federal income tax returns before the April 15th deadline. Only employees on the payroll are eligible to receive this form.
Before generating the form W-2, employees must submit a W-4 form that contains taxation information, their filing status and if they have multiple jobs. The employer calculates the tax that will be deducted from each paycheck based on the information provided in Form W-4. The Form W-2 will show the taxes that were taken out.
What is Form W-9?
This form is used by freelancers, independent contractors, and self-employed people who offer services to companies. These contractors do not work for the company. Independent contractors are required to provide their employer with information using this form. This includes their name, social security number/taxpayer identification number, and address. The organization that hires these contractors will use this information to prepare a 1099 form for tax filing. In this case, the organization does not deduct any money from the contractor’s income. The contractor is responsible for reporting and paying taxes.
The Differences between Form W-2 and W-9
Although both forms are used to collect tax, they differ in their contents, purpose and filing process. Here are some of the main differences between W-2 and W-9.
Who uses each form?
The employer is required to send the employee Form W-2. This form contains information on the amount of income tax withheld by the employer from an employee’s pay. This form is used by employees to submit their income tax.
The Form W-9, on the other hand, is filled out by independent contractors, freelancers, or self-employed individuals and sent to organizations to which they have rendered services. This form contains information about the contractor, such as his name, address and SSN/TIN.
Tax Withholding and Payroll Deductions
The tax withheld is one of the major reasons why there are different forms. Employers are required to withhold certain amounts of income tax on each employee’s paycheck. They must also withhold Medicare and Social Security taxes in addition to the income tax. The Form W-2 contains all the details of these taxes.
The organization that hires W-9 contractors is not responsible for their tax payments, and will not collect any taxes. The contractor is responsible for submitting a W-9 to the organization which they work for. The IRS allows the employer to deduct 24% from the contractor’s income if the W-9 is not provided.
Reporting Income to IRS
Employers must report Form W-2 to the IRS along with generating it. The original copy must be sent to employees, and a digital version or a copy should be sent to the IRS. When the employee files their taxes, the IRS will check the W-2s sent by the employer to ensure accuracy.
The $600 threshold only applies to the 1099-NEC form that is used to report payments. Contractors should complete and submit the W-9 form before beginning any service, regardless of income.
Impact on Social Security, Medicare
W-2 forms are issued to employees who are on the payroll of the employer. The employer pays a portion of the employee’s Social Security and Medicare tax. They are therefore less burdened. Independent contractors, on the other hand, are responsible for paying all Medicare and Social Security tax. It can result in a higher tax burden for them.
Thus, these are the W-2 vs. W-9 tax differences.
What is the difference between an employee and an independent contractor?
You now know the various forms and when to generate them. Should you be an independent contractor or employee?
Consider these aspects:
Employer Control vs. Worker Independence
The level of control the employer has on each individual’s daily activities is the main difference between being an employee and working as an independent contractor. Employers have total control over their employees’ work. They must adhere to a schedule and perform assigned tasks. In certain cases, the employee is required to work exclusively for their employer during a specified period.
An independent contractor, on the other hand, has greater flexibility. They are not under the employer’s control and do not always need to adhere to a set schedule, as long as their agreed upon responsibilities are met.
Benefits and Protection
Employees receive many benefits and protections in exchange for the complete control of their employer. Employers pay for health care, pension contributions, Medicare, Social Security, and contributions to 401(k)s or other pension funds. This reduces employee financial burden. Contractors are not eligible for any of these benefits. They must pay their own healthcare premiums, as well as Medicare and Social Security tax.
Flexibility and Tax Responsibility
Independent contractors have flexibility to choose their clients, set their own schedules and can also be flexible with their work. However, they must accurately account for their earnings and pay taxes on them. They must also submit Form W-9 for each employer, and are fully responsible for their taxes. If you are an employee, your employer will handle most of the tax preparation. You can also plan better because you get a fairly stable paycheck.
Each type of employment has both its benefits and disadvantages. This question is not a simple “yes or no” decision. It depends on what you value and your financial situation. Knowing the differences will help you make informed decisions and handle your taxes.
What happens if you use the wrong form?
It is important to know which tax form you should use based on whether you are an employee or independent contractor. The wrong form could lead to legal and financial issues for the employer as well as the employee/contractor.
Misclassifying Workers
Misclassification of workers is a common mistake. Where employees are often classified as independent workers and vice versa. This miscalculation is costly as it may lead to fines or even lawsuits by the IRS.If a business misclassifies a worker without a reason, it will be liable to pay the concerned employee’s income taxes. Workers can also file form 8919 to the IRS in order to recover their Medicare and Social Security tax that was due by the employers, if they were misclassified.
Workers’ Tax Consequences
For workers, the incorrect form could lead to higher or missed tax obligations. If an employee is classified as an independent worker, they are responsible for all Medicare and Social Security tax, since the employer doesn’t pay any. This will increase their tax burden and they’ll have to pay even more. If they can’t pay, there may be financial consequences.
It is important to plan your tax obligations in advance. Employers must also generate the W-2 tax form for employees early in order to correct any misclassifications. These proactive measures can help avoid confusion, as well as legal and financial penalties.
The Right Choice For Your Work or Business Situation
The only thing that they have in common is the fact that both are tax forms. As previously mentioned, Form W-2 is generated by the employer and sent to each employee. Form W-9, however, is created by an independent contractor, or freelancer, and sent to the employer. The information is different due to the purpose differences. W-2 contains information about the taxes that the employer has withheld and paid as well as the Medicare and Social Security tax. W-9, on the other hand, contains the information needed to create Form 1099.
The first step to fulfilling your tax obligations is choosing the correct form. Schedule a consultation if you have any questions or are unsure.
