With tax season almost here, employees and contractors are thinking about the forms the Internal Revenue Service (IRS) will require them to use to report their earnings and to file their taxes.
There are two main types of workers: The self-employed (freelancers, contractors, business owners), and also employees who work for employers who deduct their taxes.
You need to understand the Internal Revenue Service (IRS) guidelines so that you can derive joy, satisfaction, benefits, and total happiness from your dream career.
Whether to select a W2 or 1099 as the primary tax form is an important decision that will have an impact on ones work condition. It affects the ability to simply accept insurance, assignments, and benefits, and also influences tax liabilities. It is not merely a matter of decision, but it can legally implicate you. Therefore, it is necessary to make the right decision about your employment and the forms you will use.
Breakdown
For two different kinds of workers, W2 and 1099 are two distinct tax forms that are recommended. If you’re an employee, you will obtain a W2. If you’re an independent contractor or freelancer, you will use a 1099 form.
Decision
If you are a W2 employee, all payroll taxes are automatically removed or deducted from your paycheck and then your employer forwards the deductions to be paid to the government. On the other hand, it is the self-employed, contractor, or freelancer’s responsibility to make the necessary calculations about their payroll taxes and then forward the sum to the government on a quarterly basis.
Choosing
The most important factor that must be considered in your decision-making is your personality or behavior. W2s and 1099s both vary in complexity when setting up your own business. The 1099s are the most complicated with W2s being simpler. You just have to decide what best fits your way of life. This is because the cash you save on taxes at the end of the day will not appear to be justified, despite all the trouble you have gone through. They are basically the same.
Consider these factors when deciding how you want to work:
1. Are you a procrastinator? Consider W2
You should try picking a W2 to save yourself a lot of sleepless nights and troubles if you are someone who dislike tax time and would prefer a root canal than completing and submitting 1099 government forms.
W2 Pros
• Simplest and easiest option if you are not a savvy employee.
• You are not totally responsible for the employee tax burden.
• Little or no accounting required.
• W2 employee can deduct or itemize business expenses.
W2 Cons
• Deductibility of unreimbursed operational expenses and medicinal insurance premiums are extremely restricted.
• Limited capacity to withhold income if a 401(k) is unavailable.
• Transportation is not deductible
2. Do you like challenging authority? Try choosing 1099
If you have the courage and strength to find your way out and overcome all the troubles of IRS, you should try using the 1099 form. In any case, there are a few drawbacks to this option that will probably make you consider choosing W2: like your sales will probably get the attention of the IRS. Since contractors may sometimes be irresponsible about paying their taxes, the IRS has been vigilant. The government has gathered $9.5 million in back wages from employers who misclassified workers as self-employed since 2011.
1099 Pros
• Easy to begin.
• You may be qualified to collect the Home Office Deduction.
• Losses may be used to counterbalance other income (limits apply).
• Easy to cease when your agreement closes.
1099 Cons
• An unlimited obligation for the sole proprietor.
• You must make quarterly calculated tax installments.
• More complications and accounting than the W2 option.
• All benefit is liable to self-employment tax notwithstanding the income tax.
Conclusion
Whether you are an employee or an employer, the issue about W2 vs. 1099 and employees vs. contractors/freelancers is worth thinking about. With regards to who ought to be classified as independent contractor and employees, the keyword here is “control.’’ It is all about who controls the work you choose to do and how you will be taxed.