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If you don’t know a Form 1099 from a W-2, you and your business could be at risk. Each form has a different purpose, and employers have to handle each in its own way based on how the IRS lays out firm business owner responsibilities—and penalties.

Form 1099-MISC

The IRS calls its Form 1099-MISC an “information form” because it informs the IRS and the payee of monies paid as income other than wages, salaries, and tips. It is most commonly required of and used by employers who work with independent contractors.

As a business owner, you must prepare the 1099-MISC for anyone you have paid:

  • At least $600 in:
    • Rent
    • Services performed by someone who is not your employee
    • Prizes, awards, and other income payments
    • Medical and healthcare payments
    • Other payments specified in the IRS’s instructions
  • Any federal income tax withheld as backup withholding, regardless of the amount.

Using the 1099-MISC, you must report compensation paid under the following conditions to the IRS and to the recipient:

  • The payment was made to person who is not in your employ.
  • Money was paid in exchange for services in the course of your trade or business.
  • The payment was made to an individual, partnership, estate, or sometimes, a corporation.
  • Compensation equaled at least $600 during the year.

How and when the payee files their copy of the Form 1099-MISC is their responsibility, but you, as the business owner, must prepare and deliver the form by the end of February following the tax year in which the money was paid. If your business fails to issue the form on time, it faces penalties ranging from $30 to $100 for each form (depending on how long it takes for the business to issue the form). If the “failure” is intentional, the penalty increases to $250 per statement.

W-2 Form

The W-2 Form is a wage and tax statement business owners must provide to their employees for income paid for services performed. This includes any non-cash payments of $600 or more. The form reports:

  • All income in the form of wages, salaries, and tips.
  • Taxes withheld in compliance with federal, state, county, and city regulations as applicable.
  • Income, social security, or Medicare tax withheld.
  • Income tax that would have been withheld “if the employee had claimed no more than one withholding allowance or had not claimed exemption from withholding on Form W-4.”

Withholding is determined by the W-4 Form completed by the employee at hire (and revised periodically to reflect current status). The W-4 authorizes the employer to withhold taxes for a specified number of dependents. The taxes are withheld and paid regularly to the respective taxing authority.

Conscientious and accurate filings are among your business owner responsibilities. So the W-2 Form serves to provide the employee with a record to verify the withholding and deductions along with his or her annual personal report to the IRS.

The W-2 contains a number of boxes and codes designating the relevant income, taxes, withholding, and government agency. It is issued in six copies, some or all of which will be filed by the recipient employee. Payroll software and electronic filing make this otherwise cumbersome task easier.

Employers must mail the W-2 Form to employees no later than January 31 and to the IRS with the summarizing W-2s no later than February 29. Employers may request an extension, but requests are not often granted. If you cannot file the forms on time but can within 30 days, your business is subject to a penalty of $30 per form. Where the process is completed after March 30 but no later than August 1, the fine increases to $60 for each W-2. Failing to meet the August 1 date raises the penalty to $100 for each form to a maximum of $1,500,000. While these penalties are proportionately lower for small businesses, the impact is proportionate as well.

Business Owner Responsibilities

Business owners must comply with the filing regulations imposed by the IRS, Social Security, Medicare, and other taxing agencies. Absent cooperation, they face significant penalties. Any qualified payroll, accounting, or business adviser can help you fulfill your business owner responsibilities with regard to the Form 1099-MISC and the W-2 Wage Statement. But the litigation and penalties arising from mischaracterized independent contractors and under-reported overtime mandates your alert oversight.