The key to understanding W-4 and 1099 forms is to know whether you’re an employee or a sole proprietor. The W-4 signifies an employment relationship, and the 1099 represents a contractual relationship. As an employee, you fill out a W-4 and give it to your employer, who uses the form to figure how much federal income tax should come out of your paychecks. As a sole proprietor or independent contractor, you get an annual 1099 from the contracting company.
If you’re an employee, when your employer first hired you, it should have given you a W-4 to fill out. You claim your allowances on the form by selecting those that apply to you in the Personal Allowances Worksheet section of page 1. Then, complete the bottom portion of page 1 to claim your total number of allowances and filing status; give this section of the form to your employer. As a married person, you must also complete the Deductions and Adjustments Worksheet on page 2 if you will claim deductions and credits on your tax return. If you and your spouse both work, complete the Two Earners/Multiple Jobs section on page 2; this process tells you if you should have additional federal income tax taken from your wages.
If you’re an independent contractor, the company that hired you might ask you to fill out a W-9. The form signifies that the contracting company isn’t responsible for withholding taxes from your payments. In this case, you must make your own tax payments. By the end of January, the company should send you a 1099, which shows your annual earnings. The company must also file the 1099 with the Internal Revenue Service by the end of February if filing by paper, and by the end of March if filing electronically. The IRS has a number of rules on who must file a 1099. This includes a contracting party that paid at least $10 in broker payments or royalties. The contracting party must also file a 1099 if it paid at least $600 to an attorney or at least $600 in rent, prizes, awards or services or made other income payments. When you file your federal tax return on Form 1040, attach your 1099.
If you’re an employee, your employer must give you a W-2 form by the end of January each year. Whereas your W-4 helped your employer figure how much federal income tax to take from your wages, your W-2 shows your annual withholding amounts and taxable wages. Your employer must file the W-2 with the Social Security Administration by the end of February if filing by paper, and by the end of March if filing electronically. When you file your federal tax return on Form 1040, attach your W-2.
To avoid erroneously classifying employees as independent contractors and independent contractors as employees, business owners must know the difference between the two. You’re an independent contractor if you’re self-employed. You’re an employee if the person who hired you can control what type of work you will do and how you'll do it.
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