Form W2 and 1099 serve the same purpose. It is a document that employers use for reporting the income you earned from the business source in any tax year. Though the purpose is similar, each has a subtle difference – W-2 is designated for employees and 1099 is for consultants and subcontractors including those who work for IT staffing businesses. Both forms will show the amount of money that was withheld for federal as well as state taxes. The two forms together form the basis for calculating your AGI (Adjusted Gross Income). Without these two forms (from one or more employers) calculating and filing your AGI is impossible.
About Form W-2
The advantage of W-2 is that you don’t have to fill it – it is a form that your employer will give you in multiple copies – a copy for your records, a copy for filing AGI, and a few for other purposes. For your employer to give a W-2 form you must have either earned $600 or more, or the employer should have withheld some money payable to you. Normally you will receive W-2 by January 31 each year.
W-2 is not lengthy but has important information. It will include:
- Your name and mailing address.
- Your Social Security number.
- Your employer’s Employer Identification Number.
- Your total taxable wages or payments earned over the year.
- The amount of federal tax that was withheld during the year.
- The amount of state and/or local tax that was withheld.
- The Medicare and Social Security taxes were withheld.
Before you file AGI, review W-2 carefully and ensure that all information is correct and up to date. Misspelled names or a wrong social security number can cause delays because your IRS will have trouble collating records with what you are reporting and what they have on their records.
About Form 1099
There are many variants of Form 1099 and all serve a similar purpose. The difference with W-2 is that 1099 is for self-employed people, freelancers, and those who receive money outside their regular employment. It is important that you provide accurate information to avoid an audit. An audit can prove to be expensive to you if it is found that the information you have provided is incorrect.
As a self-employed individual, you will not be required to file 1099 along with the AGI but if you had employed an independent consultant or contractor then you will have to fill the 1099 form and issue it to the contractor and IRS. It is not mandatory to file 1099 along with AGI, but you are advised to keep a copy in the event of your account being audited.
Here are a few common Form 1099 variants.
- Form 1099-DIV: Dividends and Distributions – you will receive this form if you own mutual funds that pay dividends.
- Form 1099-INT: Interest Income – this form is for those who receive interest payments from banking accounts.
- Form 1099-MISC: Miscellaneous Income – Use this form for AGI if you have received payment in excess of $600 from a business for which you worked as an independent contractor.