Understand the difference between a W-2 form and a 1099 form + tips to file both forms easily to comply with the IRS.
The tax season in 2021 started with the new year and businesses are gathering all the paperwork and data required to accurately report to the IRS.
If you don’t already know, some major updates have been made to the overall business tax filing process and forms, such as the reintroduction of the Form 1099-NEC, redesigned 1099-MISC, and more.
With all the major changes being introduced in such a short time, business taxpayers are both curious and apprehensive about the tax year in 2021.
If you haven’t started working on your tax forms yet, we highly recommend that you do. Avoid heavy penalties and don’t miss out on the deadlines.
Quick Read: Deadlines & Penalties For All 1099 Forms: Updated 2021
If you’re new to business taxes, we recommend giving this checklist a glance to get a fair idea of how to get started.
- Complete Guide To The New Form 1099-NEC
- Complete Guide To The Redesigned Form 1099-MISC
- How 1099-NEC Is Replacing Box 7 Of Form 1099-MISC
So, without further ado, let’s get started on the main topic, which is to understand the fundamental differences between a W-2 Form and a 1099 Form.
While both of these tax forms are considered to be business tax forms, there is a fine line, which sets them apart and makes them unique for their designated purposes.
Understanding Form 1099
‘1099 Form’ is not an accurate way to address the forms because 1099 is not one form. It’s a series of forms. 1099 is information returns series termed as ‘1099 forms’ by the IRS for a general understanding.
Forms like 1099-MISC, 1099-NEC, 1099-DIV, and many other forms are put together under one common series called “1099”. All these informational tax forms exclusively deal with reporting business transactions of businesses and self-employed individuals in a tax year.
The IRS uses the 1099 series to track the financial activities of businesses and check if businesses are complying with the tax norms.
If found non-complying, the IRS would hit the business taxpayers with penalties, prison time, punishments, and other extreme measures.
Generally, the 1099 forms are used to report the incomes and payments made by a business in the course of business or trade in a tax year.
For example, Form 1099-NEC is used to report nonemployee compensations made by a business to independent contractors and other non-employee workers.
While Form 1099-MISC is used to report any miscellaneous incomes paid by one business to another in a tax year.