「report tax returns」Difference between W2 and 1099
Time： 2023-03-09 16:14
1. Difference between W2 and 1099
For overseas enterprises, hiring employees in the United States is a complicated matter. We usually choose labor outsourcing or part-time to carry out business. Although the formalities and compliance requirements for hiring full-time employees are avoided, we must know the legal differences between the two. Today, we will focus on sharing W2 and 1099 tax forms and their use.
What is the W2 tax form?
The IRS Internal Revenue Service W2 tax form is the salary and tax statement of contract workers (including full-time and part-time), which records the salary, benefits and withholding tax of employees in a certain tax year. The employer shall declare the W2 tax form for all employees with an annual salary of more than $600, and shall also declare the W2 tax form for the employees who have been taxed, even if it is less than $600.
What is 1099?
1099 is used to report the amount of compensation paid to temporary workers (such as independent contractors). When the amount of remuneration paid by the enterprise taxpayer to temporary workers is equal to or greater than US $600, this form needs to be filed.
Difference between W2 contract worker and 1099 temporary worker
The IRS Internal Revenue Service will classify employees according to their work and compensation methods. General contract workers are required to declare W2 tax forms, and temporary workers are required to declare 1099 tax forms.
The company of temporary workers has requirements for their work content, work place and work method, and provides them with paid leave and social security for their salary. Temporary workers can also apply for other jobs freely. In addition to the above, they are all temporary workers.
Common contract workers filing W2 tax forms:
Full-time employees with fixed time (remote or in the office) and continuous work;
Project manager with continuous work and continuous team meetings;
Delivery drivers with fixed time and route;
Designers or developers with fixed time (remote or in the office) and continuous work;
Common temporary workers filing tax 1099:
Freelancers who work according to tasks rather than fixed hours;
Provide regular consulting services for your company's projects;
Part-time personnel who are paid for services provided by APP;
Freelance designers and developers based on project work;
What type of employees should you hire?
Whether you hire temporary workers or contract workers, or both, depends on your business needs and resources.
You may need temporary workers under the following circumstances:
There is a fixed project or task
Continuous work cannot be guaranteed
The service provider can complete the work independently according to the project or task requirements
No fixed time or place is required
You may need a contract worker under the following circumstances:
Need full-time staff
The company's qualification or equipment process is required
Need a fixed working time or place
Need supervision and management
You must determine which type of employee you want to hire, and you will know how to correctly select the tax form for tax return. At the time of tax declaration, the offshore enterprise shall declare 1099 tax form for temporary workers and W2 tax form for contract workers.
As an employee, W2 contract workers should follow the arrangement of the employer to work, and can enjoy the benefits of the employer company. Social security only needs to pay 50% of the tax and the employer company pays it on behalf; 1099 Temporary workers are relatively free, but they have greater tax reporting obligations and need to pay 100% of social security (usually quarterly).
2. How do you know if you have been audited by the IRS?
Although the risk of being audited is very low for most people, it is very important for every taxpayer to know what audit is, why audit is conducted, and how to know that you are being audited.
What is audit?
IRS Audit is an assessment by the IRS Internal Revenue Service on whether the financial information provided by you is accurate, whether it complies with the tax law, and whether the tax declaration amount is accurate. Generally, it will be conducted by email or interview.
Who has the risk of being audited?
The declaration information of the tax form is inconsistent with the registration of the IRS;
Income and deductions fluctuate too much, such as home office or labor income tax credits, and the risk of being audited is greater.
The tax return submits duplicate information, such as you and another taxpayer declare the same dependant.
Income does not match life, excessive consumption and large amount of savings
How do I know that I am being audited?
If the IRS has listed you on the audit list, you will receive a written notice, which will be sent to your last recorded address. The IRS usually does not notify you of being audited by telephone or email, and different types of IRS audit notices will be given to different tax return issues.
In most cases, the notice you receive will inform you that you are being audited by the IRS, and inform you of the details of the specific items that need to be reviewed on the return. It will also mention the review records you need to provide. The deadline for submission of these documents and information will also be mentioned in the notice. The IRS will provide time for you to reply or prepare necessary documents, whether it is mail audit or on-site audit.
What will happen after the audit?
Once the audit is completed, the IRS will send you a 30-day letter detailing the adjustment suggestions required for your tax return. If you agree with the survey results, you can sign the attached agreement form,. If you do not agree with the investigation results, you have 15 days to file a tax appeal or protest to the IRS conducting the audit.
If you receive a notice of tax arrears, also known as a 90-day letter, the notice will contain details about tax arrears. You will have 90 days to pay the specified amount or submit an application to the IRS within 90 days. You must take this letter seriously and reply to this question immediately.
If you are audited, it is likely that your evaluation year is not the current year. Keeping accurate personal and business tax records, submitting error-free tax returns and submitting them on time can further reduce your chances of being audited.
3. What are 1099 forms?
Form 1099 is not just a form, but a series of documents called Information Return by IRS. It is the general name of the 1099 table family. There are many different members in this family. The 1099 table basically starts with 1099 and adds different suffixes to distinguish different types of income.
In the tax season, you may encounter 1099 tax form types:
1099-B, annual summary of trading stocks, options, commodities and other trading instruments
1099-DIV, Dividends and distributions
1099-INT, interest income
1099-R, from pension, annuity, retirement or profit sharing plan, individual retirement account, distribution of insurance contract.
1099-MISC, annual summary of miscellaneous income;
1099-NEC, which is regarded as the annual summary of wage income of temporary workers
Generally, we will divide them into two parts to summarize the use of 1099.
1. Form 1099 of investment income
As mentioned above, you may receive Form 1099 in a specific tax year. Your investment company or financial institution will check your account activity this year to determine whether you should receive a form. If you did not have specific types of income activities in that year, you would not receive Form 1099. For example, if you did not withdraw money from your retirement account last year, you would not receive Form 1099-R this year.
1099-B - used to report securities trading income and report securities trading with Form 8949.
If you have an account with a brokerage company or mutual fund company, any Form 1099-B you receive may report single or multiple transactions. You need to fill in the following information:
Box 1a - Description: This is a brief description of the assets sold. Fill in the money on Form 8949.
Box 1b - date of sale or transaction: This is the date of transaction, which is used as the sales date on Form 8949.
Box 1d - stocks, bonds, etc.: This is the amount you get from selling securities. Report it as the selling price on Form 8949. Brokerage companies or mutual fund companies usually reduce this amount through commissions. Please check the box next to the amount in Box 2a.
1099-DIV - used to report the income of stocks and mutual funds, including dividends and capital gains distribution.
You need to fill in the following information:
Box 1a Ordinary dividend: fill in this amount on Form 1040 or Schedule B (if necessary), which is taxed at the ordinary income tax rate.
Box 1b - eligible dividends: This amount shows the part of Box 1a that is taxed at the lower tax rate (the amount of Box 1a is not always taxed at the ordinary income tax rate).
Box 2a - Distribution of total capital gains: fill in this amount on Form 1040 or Schedule D (if necessary), and you may enjoy a lower tax rate.
Box 7 - External tax: This amount is the tax paid to foreign governments for international investment. You can apply for foreign tax credit or itemized deduction for this amount on your Form 1040 or Schedule a.
1099-INT is used to report interest income.
You need to fill in the following information:
Box 1 - Interest income: fill in this amount on Form 1040 or Schedule B (if necessary). It is taxed like ordinary income.
Box 2 - Early withdrawal penalty: When you withdraw money in advance for a period of time for investment, such as time deposit, this amount will be charged. Enter this amount in line 30 of Form 1040 as the income adjustment.
Box 3 - Interest on US savings bonds and treasury bond: Report this interest on Form 1040 or Schedule B (if necessary), which is usually taxed on your federal (not state level) return.
1099-R - used to report the distribution of pension, annuity, retirement or profit-sharing plans, individual retirement accounts and insurance contracts.
You can also receive SSA-1099, RRB-1099 or RRB-1099 - R from the Social Security Bureau or the Railway Retirement Committee to report the benefits you received during the year.
2. Form 1099 of non-investment income
The next two types of Forms 1099 require you to report your income on Schedule C or Schedule E, which usually requires temporary worker tax.
1099-MISC - used to report various types of income, including rent and royalties.
You need to fill in the following information:
Box 1 - Rent: report the real estate rental income you received in Schedule E, and the rent of personal property, such as machine rent, in Schedule C.
Box 2 - Royalty: The income you receive for the following reasons: the right to your works or the extraction of natural resources from your property within a specific period of time.
1099-NEC - income from your temporary work (before the 2020 tax year, this information is Box 7 reported on Form 1099-MISC). If you work in multiple companies, you will receive 1099 from each company.
4. Revised tax return and 1040X
Many people don't care after filing their tax returns, but in fact, if you find errors or omissions in the declaration information, you can use 1040X (revised tax return) to submit the corrected version of the federal return.
What are the benefits of filing an IRS amendment return?
Using the modified tax return can bring the following main benefits:
Apply for tax credit
Deduct the deduction you missed
Report additional income and withholding
By submitting the modified tax return, you may get additional refunds or additional taxes due to correction.
If you should refund, the IRS will send it to you after accepting your modified return. If you are in arrears, send the amount in arrears to the IRS together with the 1040X tax receipt. If you owe interest or fines, the IRS will bill you.
When you modify the return for specific reasons, it is best to check your entire original return. Look for the following things you may miss for the first time, such as deduction, credit, tax exemption, income and withholding.
Who can file a revised return on Form 1040X?
As long as your original tax return is 1040 or 1040SR, you can use 1040X to file a revised tax return.
What should be included in the modified declaration form
When you submit the 1040X tax return, you need to prove the relevant changes on the revised tax return, and attach the following items:
Copy of Federal Refund Deposit Certificate
W2 or 1099 not previously submitted
Any other form, schedule or document evidencing the amended return
To submit the modified tax return, you can submit it electronically or download 1040X from the IRS official website, and mail the paper document.
Deadline for submission of Form 1040X
To obtain a refund, you must usually submit the modified return before the later of the following dates:
Within three years from the date of filing the original tax return
Within two years from the date of tax payment
If you receive an extension application, the application date is one of the following:
The actual date of filing your return during the extension period
If you submit your tax return after the extension period expires, it is the tax deadline
If you file a revised tax return because of bad debts or worthless securities, you have more time to file it. In this case, you have 7 years to submit the revised return after the original return due date.
If you are a business owner, you can also submit a revised tax return when you have a net operating loss (NOL). You must submit the amended return within three years from the expiry date of the return in the year of the notice of no objection.
5. Meaning of W2 BOX and code
Box 1: Enter this amount in the salary line of your report.
Box 2: Enter this amount in the federal income tax withholding line of your tax return.
Box 5: This amount may be required on Form 8959. Please refer to the description of Form 1040 to determine whether to complete Form 8959.
Box 6: This amount includes:
1.45% of medical insurance tax withheld all medical insurance wages and tips, as shown in Box 5; 0.9% will impose additional medical insurance tax on any medical insurance salary and tip exceeding US $200000.
Box 8: This amount is not included in W2 Box 1,3,5,7. For information on how to report tips when filing tax, please refer to the description of Form 1040.
Box 10: This amount reports the maintenance and care benefits provided under the maintenance and care assistance plan. Any amount exceeding US $5000 is also included in Box 1. Fill in Form 2441, Child and Dependent Care Expenses to calculate any taxable and non-taxable amounts.
Box 12: Various W2 table codes
A - Social security tax or RRTA tax not levied on tips. Included on Form 1040.
B - No medical insurance tax is levied on tips. Included on Form 1040.
C - Taxable expenses for group term life insurance exceeding US $50000
D - Optional extension to 401 (k) cash or deferred arrangements. It also includes the extension under the SIMPLE retirement account under the 401 (k) arrangement.
E - Optional extension of salary reduction agreement in accordance with Article 403 (b).
F - Optional extension of SEP for salary reduction under section 408 (k) (6).
G - Article 457 (b) Optional extension and employer contribution (including non-selective extension) of the extension compensation plan.
H - Optional extension to 501 (c) (18)