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W-2 + 1099 Forms

689928042
689928042

It is tax season, as most of us know. If you don’t care, then you are either an outlaw on the run or living under a rock and chances are the IRS is hunting you down as we speak. For the rest of us who both submit to, and are terrified of, the Taxman, understanding a bit more about how taxes work will help you navigate your tax game more effectively. It also will help you reduce all that stress building up around tax season. Two forms you should have a grip on, literally and figuratively, are the W-2 form and IRS 1099 form.

 

Let’s start with the W-2 form

 

What the heck does W-2 mean? Don’t worry about it because it doesn’t matter as much as what the W-2 means for you. If you work for an employer, say at a company, rather than those of us who are independently contracted or self-employed, then you will get your 2017 W-2 form from your employer. The W-2 tabulates your wages, salaries, tips and other forms of compensation you received. Employers also will send a copy of the W-2 to the IRS, by the way. Why? You guessed it! Because the government may trust us (probably…) but they still operate with the “trust but verify” mentality. Can you really blame ’em? If there were only the honor system in the tax collection business, people might take advantage. So, yeah, the IRS knows all about our income.

Besides what your compensation is, the W-2 form reports the amount of taxes withheld from your paycheck, which is paid directly to the IRS on your behalf. Employers must withhold money for Social Security and Medicare, but any other amount withheld, such as for federal or state and local taxes, is determined by the number of exemptions that an employee claims on their W-4. If other taxes are withheld from your paycheck, they will be accounted for and documented on your W-2. This drab-looking document is divided into boxes used to report various items relating to income. For example, in Box 1 of the W-2 form, you’ll find your annual wage and salary payments. The amount of Federal taxes withheld from your pay can be found in Box 2. Other boxes on the W-2 form include your wages subject to Medicare tax, Social Security taxes that are withheld and information on your state income tax withholding.

The amount withheld by your employer and reported on the W-2 should be subtracted from your tax bill. Once you perform this calculation, you will know whether to expect a refund or make an additional tax payment. That’s important to know!

Remember that at the end of this tax-filing rigmarole, you must attach a copy of your W-2 to your tax return (IRS Form 1040) if you mail it to the Taxman, the Internal Revenue Service. Maybe that seems obvious, but still, it’s easy to forget. If you e-file, it is not necessary.

 

Who’s the 1099 form for then?

 

The 1099-MISC or 1099-R form are for those of us who do not work as an employee but still as a non-employee provide labor or services for which you are paid. Independent contractors, freelancers and others in some form of self-employment receive and use these forms to report income to the IRS. The government requires companies that utilize the services of independent contractors, freelancers or the like to send a 1099-MISC form for sums paid for their services. They must be sent by Jan. 31 and indicate the income paid to each contractor over the prior year (if you, as independent contractor, were paid less than $600 by a certain company over the year, then they do not need to send you a 1099-MISC but you still must account for the income.)

In addition, certain entities from which we receive funds will use a 1099-R form. This is for what is called “passive” forms of income, income we receive for something other than labor performed or personal services rendered. This incomes usually come from investments in stocks (or other securities) or interest earned on our savings; or at times represent gains in the value of assets (like real estate or art), which we have sold and have appreciated in value.

 

Note*

 

Because independent contractors are not employees, the organizations to which they provide services do not pay a percentage of their taxes or withhold it for them. This means that if you are an independent contractor, you will need to pay what you owe directly to the IRS. Nothing has been withheld and sent by either a company or an individual to the IRS on your behalf. But, the IRS is smart, they do not wait for you to pay what you owe at the end of the year. If you will owe at least $1,000 to the IRS this year, you need to submit quarterly tax payments. In this case, you will actually need to estimate your tax liability based on the most recent quarter and use what is called a 1040-ES form payment.

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Header image: Shutterstock

 

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