Preparing the Form 1099 Miscellaneous for an Employee

by Michael Marz
the difference between an employee and independent contractor is key to 1099s.

the difference between an employee and independent contractor is key to 1099s.

If part of your job duties include preparing the required tax forms for contractors and employees who provide services to your company, you may want to know when using Form 1099 Miscellaneous is appropriate and when it's not. This is because only contractors – not employees – receive 1099-MISC forms. But sometimes, the challenging part is figuring out who are employees and who are independent contractors.

Employee Or Contractor

Since both may perform the same type of services, there may not always be a distinguishable difference between your company's employees and contractors. Generally, employees have limited control over which tasks to complete, where they must be completed, or how they go about completing them. In contrast, contractors usually have more flexibility and control over their work and don't typically receive employee benefits, such as subsidized health insurance or 401(k) matching. And unlike employees, contractors frequently pay their own business expenses and don't receive reimbursements for them, whereas employees aren't ordinarily burdened with out-of-pocket costs for the benefit of their employer.

Preparing 1099-MISC Form

Form 1099-MISC must be prepared for every service provider who works as a contractor and receives annual payments totaling $600 or more. Initially, you'll want to collect W-9 forms from each contractor since the information entered on it, such as the contractor's name and Social Security number, needs to be reported on the 1099-MISC. Other than the contractor's identifying information, report the total amount your company pays him during the year in box 7 of the form – which covers all non-employee compensation. All 1099-MISC forms that your company is required to prepare must be furnished to contractors by Jan. 31 and filed with the Internal Revenue Service by Feb. 28, or if filing electronically, by March 31.

W-2 For Employees

Your company's employees have their annual compensation reported as well, but it's done on W-2 forms rather than the 1099-MISC. The 1099-MISC deadlines equally apply to W-2 forms, but instead of filing them with the IRS, they're sent to the Social Security Administration. Employee W-2 forms report more than just annual earnings. Federal, state and local income taxes, as well as employment taxes, are withheld from employee paychecks and the annual totals are reported in separate boxes of the W-2. As a result, preparing W-2 forms can be a little more involved than 1099 forms.

Benefits Of Contractors

Employers stand to save a significant amount of money by using contractors rather than hiring employees. Payments to contractors aren't subject to tax withholding, so companies don't need to allocate resources to depositing, calculating and reporting these taxes. Companies with employees are legally obligated to pay employment taxes on behalf of each worker, but with contractors, no employment taxes are owed since they're considered self-employed. And since contractors don't receive the same employer-provided benefits as employees, the cost of labor can decrease dramatically when compared to the cost of having an employee.

About the Author

Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning.

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