The Importance of IRS Form W-9

The IRS (Internal Revenue Service) Form W-9 is usually used by individuals who are self-employed or sovereign contractors.

If you ever find yourself in a situation of filling out a Form W-9, this in general means that a company or person paying you money needs your Social Security number so as to notify the IRS of the amount. The W-9 is used in a wide range of payment cases, but generally, the taxpayers who fill it out are because they are self-employed or as sovereign contractors instead of employees.

Sovereign contractors vs. the employees

When you fill out a Form W-9 before doing a job for a company as a sovereign contractor, you are not considered an employee regardless of being doing the same type of work as one of them. The differences can be almost unnoticeable, but in general, sovereign contractors have more control over when and how to finish tasks and do not receive any of the benefits that employees have, such as contributing to a 401 (k) retirement plan or a health insurance. However, as a sovereign contractor, you have the right to claim more deductions for your work-related expenses, such as the cost of maintaining a home office.

When you receive a Form 1099

When you are asked to fill out a Form W-9, at some point in the future you may receive a Form-1099 from the person or company that pays you. This is comparable to an employee’s Form W-2 but is much easier in that it only reports gross payments, reports payments without any or very few deductions.

This 1099 is essential to fill out your tax return at the end of the year. You must add up all amounts reported on 1099 forms in your gross income, as they are fully taxable just as if they were an employee’s wages. If you do not report any of this income and must pay taxes on it, you may be subject to a series of penalties that will increase the amount you owe.

Request for a Form W-9

You can even find yourself on the other side of the transaction, if you’re the one making payments to a sovereign contractor. You have the duty to ask the contractor for a W-9 form and retain a copy of it; however, it is not necessary to send it to the IRS.

When the time comes to report all the payments you made to the sovereign contractor on a Form 1099, you will need the information on Form W-9. You are only required to issue a 1099 if you were paid by the sovereign contractor $ 600 or more during the tax year. If so, you must submit Form 1099 to the IRS as well.

What is Form W-2?

A Form W-2 indicates the amount of tax withheld from your salary during the year and is used to file your federal and state tax return. Here you will find the fundamental concepts of it.

The IRS (Internal Revenue Service) requires employers to report employee wage and salary details on Form W-2. Your W-2 also reports the amount of federal, state and other taxes withheld from your salary. As an employee, the information on your W-2 form is extremely essential to preparing your tax return. To make sure you get it on time, the IRS requires your employer to send you your W-2 form by January 31 following the close of the tax year, which is commonly December 31.

W-2: wages and deductions

You should only receive a Form W-2 if you work as an employee. If you are a sovereign contractor or self-employed, perhaps the work you do may be the same as that of an employee, but you will receive an income report on Form 1099 rather than Form W-2.

Form W-2 is separated into boxes that report a variety of topics associated with your income. In box 1 of Form W-2 you will find your annual salary and the payment of wages with the amount of federal taxes withheld in box 2.

Because only a portion of your income is subject to Social Security taxes, Box 3 may report less than total wages for the year. Other boxes on Form W-2 include wages subject to Medicare taxes, Social Security taxes pending, and information on withholding from your state income tax, if applicable.

Importance of tax withholding

When the employer withholds part of your salary for federal income taxes, those withholdings are forwarded to the IRS all through the year. You may not comprehend it, but in most cases, you cannot wait until July 15 to pay your full tax debt. The IRS requires everyone to make periodic payments all through the year; however, your employer takes care of this for you.

When preparing your federal return and calculating your tax for the year, the amount of withholding made by your employer and shown on the W-2 must be subtracted from your tax liability. Once you do this calculation, you will know if you should expect a refund or if you have a balance to pay. If you submit a state income tax return, the same calculation is required for the amount withheld intended to pay your state taxes.

Verification of your name and Social Security number

The W-2’s identification information section is an important tracking feature. If the income you report on your tax return does not match the information on your Form W-2, the IRS will want to know what the reason is. Also, the IRS will evaluate the amounts of the reported payments with the amounts on your employer’s corporate tax return form to verify their precision.

But most significantly, because the IRS receives a copy of your Form W-2, it already knows if you owe taxes and can contact you if you don’t file a tax return. If the name or Social Security number on your Form W-2 is wrong, you should instantly report it to your employer for correction.

Attaching your W-2

When completing your tax returns and preparing them for submission, remember that a copy of your W-2 must always be attached. If you are using the e-file service, then your W-2 information is sent along with your tax return. However, if you submit your tax return by mail you should not forget to attach a copy of your W-2 to your return.