If you’re a home improvement contractor who is just getting started, you probably have a lot of pressing questions about managing a business. One such query is: “Should my employees be completing a W-9 or a W-2?” This is a typical query, and for good reason. It takes some research to determine which form is the best one to provide to your employees. Luckily, weve done the research for you. The W-2 and W-9 forms are discussed in detail here, along with our recommendation for which one your business should use.
A W-2 form is a document that employees fill out to give their employers the information needed to deduct federal and state taxes from their paychecks. This indicates that the person is considered an employee and is therefore entitled to workers’ compensation and disability benefits. They will also be eligible to collect potential unemployment benefits. The Internal Revenue Service (IRS) defines an employee as a person whose employer has the authority to direct how and what tasks are performed. This is true even if the worker is given discretion, as long as their employer retains the authority to control how their work is done specifically.
Workers who complete a W-9 form are regarded as independent contractors and no taxes are deducted from their pay. Instead, they file an annual tax return and pay their federal and state income taxes. Similarly, these workers are not eligible for the above benefits. According to the IRS, a person qualifies as an independent contractor if the payer has the authority to control or direct only the work’s outcome and not what will be done or how it will be done. Similar to this, there is no employer-employee relationship between the parties in the case of an independent contractor (based on contractual obligations and employee-type benefits) nor does the business have the authority to exercise financial control over the person.
Which form should I issue? As a contractor, distributing W-2 forms is typically in your best interest as well as the interests of your employees. For those who choose their own schedule, provide their own tools, and carry out their work at home or on their own property, a W-9 is required. You’ll want to be ready in case of an on-the-job injury or other mishap given that your employees are working according to your hours and performing potentially dangerous labor on a client’s property. If you’re still unsure whether a worker is an employee or an independent contractor, you can find more information on the differences between the two on the IRS website. Additionally, you can submit an SS-8 form for the IRS to use in determining their status.
The Basics of Tax W2 vs W9 – Interview with CPA Gary Topple
When to use a W-2
You most likely receive a W-2 form from your employer if you are considered to be a company employee. A person is considered an employee if they are paid by a company and are included on their tax returns. Employers have the option of paying their staff an hourly wage or a fixed salary.
If you make more than $600 per year from your job and are eligible for benefits like workers’ compensation, disability, and the future ability to apply for unemployment benefits should the need arise, you are most likely classified as an employee. Most employees are aware of their classification before starting a new job, but if you’re unsure, you can always ask a superior or conduct some research.
What is a W-2?
A W-2 form contains details about your employer(s), salary, and withheld taxes for the previous year that the IRS needs during tax season. The form includes information about your annual income, which has an impact on how much you might owe the government or they might owe you.
Typically, employers begin a new calendar year or tax season by sending W-2 forms to their staff. Legally, W-2s for earnings from the prior year must be mailed or distributed by January 31. Employees then have until April 15 to file their taxes using the data on their W-2s and any other pertinent tax documents in order to determine any returns or unpaid state or federal tax money.
When to use a W-9
When you begin working as a freelancer or independent contractor, you can complete your W-9 form. When they begin their contract with an employer, the majority of independent contractors receive a W-9 form. You might receive your W-9 after the probationary period, as some employers use it to determine whether you’re a good fit for the position.
W-9 forms are sent to employees by businesses, so if you believe you should have received one but haven’t, you can ask your employer about it. Employers do not have to deduct taxes from your earnings if you work as an independent contractor or freelancer, so it can be beneficial to set aside 20 to 30% of your income for the upcoming tax season in case you end up owing any federal or state taxes.
What is a W-9?
You must complete a W-9 form at the beginning of a contract because it contains information about you that employers need to report your income for tax purposes. It includes private data such as your address and social security number. If you work as an independent contractor or freelancer on a project for a person or business, you must complete a W-9 form. Additionally, most workers who must complete a W-9 form anticipate making more than $600 during the duration of their contract.
Many W-9 employees are entitled to a tax deduction for all medical insurance premiums paid, including for any spouses or dependents. If you work remotely, you can also deduct the cost of a home office by multiplying the square footage by $5, per IRS guidelines. These specifics are listed on a W-9 form and may be entered at the start of employment.
How to tell whether you need a W-2 or a W-9
There are a few fundamental signs that will tell you whether to use a W-2 form or a W-9 form. A W-2 should be provided to you if you were an employee of a company in the previous year.
When working as a freelancer or independent contractor, you must complete and submit a W-9. For independent contractors or freelancers who need a W-9 form, the contract must pay at least $600. Since W-9 workers typically receive their forms at the beginning of their contracts, if you’ve been working as a freelancer or independent contractor, you may already have completed your W-9 form.
When not to use a W-9
You may not need to complete a W-9 form if you do not meet the following criteria because it is a specific form for independent contractors:
What is a W9 form used for?
Use Form W-9 to give the person who must file an information return with the IRS your correct Taxpayer Identification Number (TIN), for instance: Income paid to you. Real estate transactions. Mortgage interest you paid.
Do I pay more taxes with a W9?
You pay taxes as a W-9 employee for the same reasons as your W-2 coworkers. The distinction is that W-2 employees receive partial payment assistance from their employer. Due to the fact that you have business-related deductions that salaried employees do not, you will pay more in taxes.
Who needs to fill out a W9?
Employers using independent contractors must give them a W-9 form to complete before they begin working. Who qualifies as an “independent contractor” and must complete a W-9 form must meet a number of requirements.
Do I get a W-2 as an independent contractor?
Payments made to independent contractors—who are responsible for their own employment taxes—are reported using a 1099-MISC. Contrarily, a W-2 form is used by workers whose employers deduct payroll taxes from their pay.