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Which Employment Tax Forms Do You Need, W-2 or 1099?

Which tax forms do you give to your workers to report their income?

When filing one's federal income tax returns, one key document is the employee's W-2 statement of wages. Or, in the case of an independent contractor, Form 1099 provides the information on how much the worker earned.

But many employers don't realize that the form is only one part of the critical question: Is a worker more properly classified as an employee or contractor? Only after making that determination can they determine which form they need to send.

Unfortunately, it's not as easy as simply telling someone that they're an employee or independent contractor. It's really a question of law. You can't tell someone they're an independent contractor and then treat them like an employee, or vice versa.

Obviously, there's one huge incentive to having independent contractors: The employer doesn't have to withhold taxes.

For employees, an employer is required to withhold taxes, pay Social Security and Medicare taxes, and pay unemployment tax on their wages.

There isn't just one key deciding factor to determine whether a worker is an "employee." There are several. In fact, it's the combination of factors that can lead a court or the IRS to determine that an independent contractor is really a misclassified employee.

The IRS looks at the degree of control the employer has over the employee and her work tasks. The IRS also looks at finances, and determines whether the worker is reimbursed or uses company property to perform his duties.

Another aspect is how important and critical the worker's job tasks are to the employer's overall business.

Misclassification can be costly. An employer could have to pay back the unpaid taxes to the IRS. There may also be penalties.

To summarize, an employer needs to ensure that their classification of workers complies with the law. Because the issue can be a bit complex, you may want to work with a Houston employment lawyer to make sure you're right.

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