The United States has a complex tax system that can be confusing for both employers and employees. In this country, there are two taxation tiers – federal and state, and the calculations are different for both. Moreover, the tax calculations for each state are different, adding to the confusion. Another layer of complexity is the different tax forms for workers that must be prepared and submitted depending on the employment relationship between a worker and an organization.
Two such forms that seem similar, yet very different, are Form W-2 and Form W-9. In this article, we will explore Form W-2 vs. Form W-9 and their impact on taxation to help you understand which one you must file.
Understanding Form W-2 and Form W-9
The tax process and the forms that must be filed depend on an individual’s employment terms with his or her employer. Depending on these factors, the appropriate tax forms for workers must be submitted.
What Is Form W-2?
Every employer in the U.S. has certain tax responsibilities, including creating tax forms. One such form is Form W-2. This is generated by the employer and sent to the employee before the 31st of January. This form has details about the income tax that was withheld from an employee’s paycheck. It also includes other payroll tax withholding information, like Social Security Tax and Medicare. Employees use this form to prepare their taxes and file them before April 15th, which is the standard deadline for submitting federal income tax returns in the United States. This form is received only by employees who are on the payroll of the organization.
Prior to generating form W-2, an employee must send a form called W-4 that has taxation information of the employee, the filing status, and multiple jobs, if any. Based on the details provided in Form W-4, the employer will calculate the taxes that must be withheld in each paycheck. Form W-2 will reflect these taxes that were withheld.
What Is Form W-9?
Form W-9 is another taxation form, but it serves a different purpose.,This form is filled out by a freelancer, independent contractor, or a self-employed person who offers services to a company. These contractors are not on the payroll of the organization. Using this form, independent contractors must provide information to the employer, including their name, address, and social security number/ taxpayer identification number. With this information, the organization taking the services of these contractors will prepare a form called 1099 for filing taxes. In this scenario, the organization will not withhold any money from the income of the contractor. However, the responsibility to report and pay taxes is on the contractor.
Key Differences Between Form W-2 and Form W-9
Though both forms are used for taxation, their purpose, contents, and filing processes vary. Below are the key W-2 vs. W-9 tax differences.
Who Uses Each Form?
An employer has obligations to generate the appropriate tax form, called Form W-2, and send it to employees. This form will have information about the income tax that was withheld from the employee’s paycheck. This form is used as the basis for employees to file their income tax.
In contrast, Form W-9 is filled by an independent contractor, freelancer, or self-employed individual and is sent to the organization to whom they rendered their services. This form contains tax information like the contractor’s name, address, and SSN/TIN.
Tax Withholding & Payroll Deductions
One of the main reasons for the difference in forms is to account for the tax withheld. Employers must withhold a certain amount of income tax from each paycheck of every employee. In addition to this income tax, they have to withhold other taxes like Medicare and Social Security tax. All these withheld taxes are detailed in Form W-2.
W-9 contractors are responsible for paying their taxes, and the organization taking their services will not withhold any tax. Also, they are responsible for providing a W-9 form to the employer. If the contractor does not provide W-9, the IRS authorizes the employer to withhold 24% of the income as taxes.
Reporting Income to the IRS
Along with generating Form W-2, employers must also report the same to the IRS. They must send the original copy to employees and file a digital copy or send a copy to the IRS. Later, when the employee files taxes, the IRS checks against the W-2s that the employer sent to ensure accuracy.
It’s important to note that the $600 income threshold applies only to the 1099-NEC form, which is used to report payments. The W-9 form, on the other hand, should be completed and submitted by the contractor before any services begin, regardless of the income amount.
Impact on Social Security and Medicare
Employees who get a W-2 form are on the payroll of the employer. This means a part of their Social Security and Medicare taxes are paid by the employer. As a result, they have a lower burden. In comparison, independent contractors are responsible for paying the full Medicare and Social Security taxes. This can lead to higher tax burdens for them.
Thus, these are the W-2 vs. W-9 tax differences.
How to Know If You Should Be an Employee or an Independent Contractor?
Now that you know what the different forms are and when they must be generated, should you be an employee or an independent contractor?
Here are some aspects to consider:
Employer Control vs. Worker Independence
A main difference between an employee of an organization and an independent contractor offering services is the level of control that the employer has over each person’s everyday activities. In general, employers have complete control over an employee’s work, and they must follow a set schedule and complete assigned responsibilities. In some cases, an employee will have to work exclusively for the employer during the agreed period.
In contrast, an independent contractor has more flexibility. The employer does not have complete control over their activities, and they don’t always have to follow a defined schedule as long as they complete the agreed-upon responsibilities.
Benefits & Protections
In return for complete control, employees get many benefits and protections from the employer. Health care, contributions to a 401 (k) or another pension fund, and partial payment of Medicare and Social Security taxes are borne by the employer, and this reduces the financial burden of an employee. Contractors do not get any of these benefits, and they must take care of their healthcare premiums and pay 100% of Medicare and Social Security taxes.
Flexibility & Tax Responsibility
While independent contractors enjoy flexibility in choosing their clients and setting their schedules, they also have the burden of accurately accounting for their earnings and paying taxes on them. Also, they must submit Form W-9 to every employer and bear full responsibility for their taxes. But if you’re an employee, much of this tax preparation responsibility is handled by the employer. Moreover, you have a relatively stable paycheck and can plan your finances better.
As you can see, each form of employment has its own share of benefits and drawbacks. There is no “best” answer to this question, rather, it depends on your priorities and financial situation. That said, knowing the differences can help you make an informed decision, and accordingly, you can handle your taxes.
What Happens If You Use the Wrong Form?
You must know the employee vs. independent contractor tax forms and use the right one based on your employment type. Submitting the wrong form can lead to financial and legal issues for both the employer and the employee/contractor.
Misclassifying Workers
A common mistake is worker misclassification, where employers are classified as independent workers and vice versa. Unfortunately, this miscalculation can be expensive as it can lead to fines and sometimes, even lawsuits from the IRS. If a business misclassifies a worker without a reason, it will be liable to pay the concerned employee’s income taxes. Also, workers have the option to file Form 8919 with the IRS to collect their Medicare and Social Security taxes that were due by the employer, provided they were misclassified as independent contractors.
Tax Consequences for Workers
For workers, using the wrong form can lead to increased or even missed tax liabilities. For example, if an employee is classified as an independent worker, the employee becomes responsible for paying Medicare and Social Security taxes fully, as the employer does not bear any of it. Undoubtedly, this increases their tax liability, and they will have to pay more taxes. They may even have to face financial consequences if they cannot pay these taxes.
Due to these reasons, it is a good idea to complete the W-9 contractor taxes form at the earliest, so you can plan for tax liabilities. Similarly, employers must generate the W-2 employee taxes form early to adjust for any misclassifications. Such proactive measures can avoid confusions as well as the legal and financial penalties involved.
Making the Right Choice for Your Business or Work Situation
To conclude, Form W-2 and Form W-9 are taxation forms, but that is where the similarity ends. As mentioned, an employer generates Form W-2 and sends it to every employee, while an independent creator or freelancer creates Form W-9 and sends it to the employer. Due to the differences in purpose, the information contained is also different. While W-2 provides the taxes withheld by the employer and the Medicare and Social Security taxes paid, W-9 contains the tax information of the independent contractor, using which the employer can create Form 1099.
Choosing the right form can be the first step toward fulfilling your tax responsibilities. If you are unsure or have questions, schedule a free consultation.
