If you perform work for a company, your pay will be reported to the Internal Revenue Service on one of two forms, depending on your status. If you're an employee and you and the business pay Social Security taxes on your behalf, you'll get a W-2 statement of earnings. If you're a freelancer or independent contractor, it will be a Form 1099-MISC.
A W-2, wage and tax statement, shows your total compensation and how much pay was withheld for federal income taxes, Social Security and Medicare. It also shows any amounts held for state and local taxes or for retirement plans. You'll get a copy from your employer, who's required to provide one by Feb. 1 for the preceding tax year.
A 1099-MISC reports miscellaneous income, including any non-employee compensation you received totaling more than $600 for the year. You'll get a 1099 from everyone you worked for during the year. A 1099-MISC can also report such things as rents, royalties and other payments, but your employment-type pay, for freelance work or as a contractor, will be shown on Box 7. Under certain circumstances, the company is required to withhold federal income tax from this pay, and it will show in Box 4.
W-2 Key Elements
An employer will pay part of your Social Security and Medicare taxes, plus any federal or state unemployment taxes. You'll use Box 1, compensation, for the amount to report on your federal income tax form and Box 2, income tax withheld, to figure what tax you owe or how much refund you are due.
With a 1099-MISC, you are responsible for paying not only all your income tax, but you are subject to a self-employment tax. That tax replaces the Social Security payments you and an employer contribute with W-2 wages. You're also responsible for reporting income and expenses and making quarterly tax payments.
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