Understanding W2s and 1099s
When it comes to tax forms, W2s and 1099s are two of the most common forms you will come across. While they both relate to taxes, it is important to understand the difference between them.
A W2 form is used by employers to report the wages they paid to their employees over the course of a year. If you work for a company, you will receive a W2 form from your employer that shows how much money you have earned, how much tax was withheld, and other important information. This information is then used to fill out your personal tax return.
W2s come with a range of benefits that can help you establish a stronger and more stable financial future. Depending on your employer’s benefit package this can include the following as some examples. These can be funded by you, your employer, or a combination of both.
- Health insurance options
- Dental and vision insurance
- Retirement savings plans
- Disability and life insurance
Additionally, W2s offer protection such as state and federal unemployment insurance and worker’s compensation insurance, all provided by your employer.
On the other hand, a 1099 form is used to report income that is not earned as an employee. If you are a freelancer or an independent contractor, you will receive a 1099 form from any company or individual who paid you more than $600 over the course of the year. This form reports the income you earned, but unlike a W2, it does not show any taxes that were withheld. Instead, you are responsible for paying taxes on this income yourself when you file your tax return. On an hourly basis a 1099 worker’s fee is higher than a W2 worker, this is primarily so the 1099 worker can cover taxes, benefits, and expenses which are all costs the 1099 worker is responsible for.
While 1099 jobs offer no benefits, unemployment, or worker’s compensation – they do offer more much more flexibility and diverse income streams. Plus, as your own boss, you have complete control over your earnings.
In summary, while both W2’s and 1099s are used for tax purposes, they are used in very different contexts. W2s are used to report wages earned as an employee, while 1099s are used to report income earned as a freelancer or independent contractor. But which is better? This depends on your situation. It is important to understand the difference between the two, as it can greatly impact how you file your taxes and how much you owe. Run the numbers including taxes and insurances to compare and consult with your advisor!
