• info@kaizencpa.com
  • Our Office: USA - Hong Kong - Shenzhen - Shanghai - Beijing - Taiwan - Singapore - Japan - UK

+852 2341 1444(Hong Kong)
+86 755 8268 4483(Shenzhen)
+65 6438 0116(Singapore)

Search for anything.

Knowledge

  • Home
  • Knowledge
  • The difference between employment and contract service in U.S.

The difference between employment and contract service in U.S.

2024-10-15
Forms W-2 and 1099 are both common payroll income tax forms that apply to two different types of workers in the business, respectively. Form W-2 generally applies to employees who receive a regular wage salary and employee benefits, while Form 1099 is for contractors, self-employed, independent contractors, freelancers, or gig workers

  1. About Form W-2

    (1)
    		 Introduction to Form W-2

    Form W-2 (Wage and Tax Statement) is an Internal Revenue Service (IRS) tax form used in the United States to report wages paid to employees and the taxes withheld from them. Employers must complete a Form W-2 for each employee to whom they pay a salary, wage, or other compensation as part of the employment relationship.
    (2)
    		 Filing requirements

    Form W-2 must be completed by the employers. sent to employees and filing to the Social Security Administration (SSA). If over 250 instances of Form W-2 are being filed for the year, electronic filing is required. Form W-2 requires 4-6 copies:
    (a) Copy A – Submitted by the employer to the Social Security Administration.
    (b) Copy B – To be sent to the employee and filed by the employee with the employee's federal income tax returns.
    (c) Copy C – To be sent to the employee, to be retained by the employee for the employee's records.
    (d) Copy D – To be retained by the employer, for the employer's records.
    (e) Copy 1 – To be filed with the employer's state or local income tax returns (if any).
    (f) Copy 2 – To be filed with the employee's state or local income tax returns (if any).

  2. About Form 1099

    (1)
    		 Introduction to Form 1099

    Form 1099 is to prepare and file an information return to report various types of income other than wages, salaries, and tips (for which Form W-2 is used instead). such as reporting payments to independent contractors, rental property income, interest and dividend income, sales income, and other miscellaneous income. Commonly used forms in the 1099 series include 1099-NEC (non-employee compensation), 1099-MISC (miscellaneous income), 1099-INT (interest income), 1099-DIV (dividend income), and 1099-B (sales income), etc., this article focuses on 1099-NEC.

    If more than $600 is paid to a 1099 worker who provides services in a year, you will need to complete Form 1099-NEC. Form 1099-NEC generally applies but is not limited to the following situations:

    (a) Freelance work: Writers, editors, designers and other freelancers, whether operating as LLCs or sole proprietors, will receive a 1099-NEC for compensation received during a calendar year.
    (b) Contract work: Any contractors who aren’t paid as W-2 employees through a staffing firm (or otherwise have employment taxes withheld) will receive Form 1099-NEC.
    (c) Independent services: Any small businesses doing things like web design, legal or accounting work, or network administration services will likely be subject to this type of reporting.
    (2)
    		 Filing requirements

    Each payer must complete a Form 1099 for each covered transaction. Three or four copies are made: one for the payer, one for the payee, one for the IRS, and one for the State Tax Department, if required. Payers who file 250 or more Form 1099 reports must file all of them electronically with the IRS. If the fewer than 250 requirement is met, and paper copies are filed, the IRS also requires the payer to submit a copy of Form 1096 (If you submit electronically, you do not need 1096).

  3. Form W2 vs 1099

    ITEM

    W-2

    1099

    Time of filing

    Before January 31 of the following year

    Before January 31 of the following year

    Taxpayer

    Employees who receive regular wages and employee benefits

    Independent contractors, freelancers, or gig workers, etc

    Applicable conditions

    1.Income, Social Security, or Medicare tax was withheld.

    2.Payments of $600 or more for the year.

    Payments of $600 or more for the year. 

    Tax liability

    Employers withhold federal income tax, Social Security and Medicare taxes, and state income tax from employees’ paychecks

    Employers do not need to withhold taxes, taxpayers pay their own taxes

    Tax

    1. Federal income tax and state income tax, withholding according to the applicable tax bracket;

    2. Social Security Tax and Medicare Tax: 7.65%;

    3. Miscellaneous taxes (such as disability insurance, etc.) required by some states.

    1. Taxpayers need to pay the corresponding federal income tax and state income tax when filing their personal income tax returns at the end of the year;

    2. Social security tax and medical insurance tax 15.3% (including 7.65% borne by the employer);

    3. Miscellaneous taxes required by some states (such as disability insurance, etc.).


Disclaimer

All information in this article is only for the purpose of information sharing, instead of professional suggestion. Kaizen will not assume any responsibility for loss or damage.

WhatsApp/Line/Wechat: +852 5616 4140

Related Posts

Introduction to Voting Power of Shareholders in the U.S. Corporation

Voting rights pertain to the entitlement of corporate shareholders to participate in decisions regarding corporate policies. Typically, only shareholders of record have the privilege to vote either in person or through a proxy (unless they possess non-voting shares) during a shareholders' assembly. The corporate records will list the owners of all outstanding shares, along with the record date preceding the meeting.

Introduction about U.S. Marketplace Facilitators and Sales Tax

With the establishment of Economic Nexus, many states have enacted Marketplace Facilitator Acts (MFAs) that require some Marketplace Facilitators to be responsible for collecting and remitting sales tax on behalf of remote sellers. Marketplace Facilitators generally are required to obtain a seller’s permit or register a seller's sales tax number firstly for a marketplace or platform’s seller in a particular state

What Remote Sellers Need to Know About U.S. Sales Tax

Before Sales Tax Reform, a seller must have a “taxable nexus” in a state before the state can require the seller to collect and remit sales and use tax. Therefore, remote sellers should also be considered physically present to be subject to sales tax. For example, having an office or other place of business in the state, hiring employees in the state, or holding a property in the state.

What are U.S. sources of retirement income?

Nearly 35 million Americans were 65 or older in year 2000，and the average American, according to the U.S. Census Bureau retires at age 63. As the minimum guaranteed system of federal pensions (Social security payment) led by the US government has gradually weakened in recent years, the US pension market is mainly dominated by the social security system, which gradually favors the savings pension insurance dominated by individuals and enterprises.