W-2 employee forms: A small business owner's guide to filing

If you’re a small business owner ready to hire workers, you need to understand the tax implications of doing so. Business owners can recruit two types of workers — employees and independent contractors, otherwise known as self-employed workers.

The type of tax forms that you file will change depending on the worker classification. We’re here to breakdown the differences between employees and independent contractors and help you get started submitting employee W-2 forms.

W-2 employees vs. independent contractors

Before we dive deeper into how to file Form W-2s and why you need to do so, it’s essential to understand what an employee is and how they differ from independent contractors.

Employees are workers that your business hires under an employment agreement. You can utilize both part-time and full-time employees. Business owners dictate when, and how often, their employees work. The business is responsible for providing supplies to the workers, offering employee benefits, and paying taxes on their wages — more on that in a second.

Independent contractors, on the other hand, work for themselves. Instead of entering into an employment agreement, businesses and self-employed workers enter into a contract. The contract will outline what the company expects the contractor to do and how much it will pay the contractor.

Contractors can work for more than one business at a time. They set their own hours and use their own supplies. The degree of control that your company has over freelancers is far lower than what it has over employees.

How do taxes work?

Each year, businesses and workers must pay federal tax and state income tax. The type of tax they pay depends on their classification status. Let’s take a look at how federal taxes work, as state taxes can vary significantly depending on which state you’re filing in.

Businesses who hire employees are responsible for paying a percentage of the employee’s taxes. They must pay 6.2% Social Security tax and 1.45% Medicare tax. They also must pay state and federal unemployment taxes. The employee is responsible for matching the 6.2% and 1.45% tax rates when filing their income taxes.

Companies are not responsible for paying any taxes to independent contractors. Instead, freelancers are required to pay their own taxes. They do so by paying a Self-Employment Tax, which is a total of 15.3% of wages earned.

Tax forms for employees and contractors

There are two primary types of tax forms that you’ll need to send depending on the kind of relationship you have with the worker. As the business owner, it’s your responsibility to make sure the form is accurate and you deliver it to the worker by the IRS deadline. Otherwise, you could face stiff penalties.

Employees will receive an Internal Revenue Service (IRS) Form W-2. Any employee that you’ve paid during the previous calendar year, from January 1 to December 31, should receive one of these forms.

The W-2 form is crucial because it’s how you report the total wages and compensation for the year to both your employee and the IRS. Your employees will use the W-2 form that you provide as they prepare their own personal tax return for the year.

Independent contractors will receive an IRS Form 1099-MISC. This is a tax payment form that indicates how much a self-employed individual earned over the past year. You’ll send this to contractors who made at least $600 working for you.

Why it’s essential to file the right tax forms

A misclassification of workers, whether it be accidental or intentional, could have severe implications. Businesses will need to complete IRS Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. You’ll need to file one of these forms for each one of the misclassified workers.

After receiving the form, the IRS will levy back taxes. You may be required to pay wages to employees going back at least three years, along with having to pay penalties such as a $50 fine for each misclassified employee.

Why hire employees?

So far, while reading this, you may find yourself wondering what the perks are of hiring employees over independent contractors.

It’s true that employees often result in higher expenses. Not only do you have to pay payroll taxes on employees, you must also account for employee benefits like vacation pay, sick pay, and health insurance. Additionally, you may need to secure workers compensation insurance, which you won’t need for contractors.

However, hiring employees can provide you with much more company control. You have more say over things like deciding how and when your employees work. If you’re a business owner who likes, or needs, to have something done a certain way by a specific time, hiring an employee is in your best interest.

Additionally, employees tend to have much more loyalty to the company they work for. Contractors can work for dozens of companies and may not have much company loyalty. You may find that employees more strongly value their job, financial security, and role within the company

Lastly, there’s a sense of security that comes with hiring employees. You generally know that they’ll be at the office, jobsite, or on their remote computer during specified hours. Furthermore, the process of finding independent contractors can be overwhelming, and finding one in a pinch can be challenging. With employees, you know exactly what you’re going to get and what to expect from your workers.

Filing a W-2

If you think that hiring employees is the right choice for your company, it’s time to learn how to fill out a W-2. According to the IRS, the due date to file these forms is January 31 of the following tax year. So, for instance, for tax year 2019, you need to submit all tax information by the end of January 2020. You must file with the Social Security Administration (SSA).

You can file via online e-File or hard copy. If you do decide to submit a hard copy, you can order the forms from the IRS website, You’ll receive multiple copies of the form and a set of instructions. Copy A is supposed to go to the SSA. Make sure that you complete Copy A in red ink so that the SSA can scan it. You’ll keep Copy D for your employment records.

You must file W-2 forms if you “withheld any income, social security, or Medicare tax from wages regardless of the amount of wages.” You also must file if your employee claims more than one withholding allowance.

A withholding allowance is a type of exemption that employees indicate when submitting their IRS Form W-4. Employers use the information on the W-4 Form to determine the amount of taxes they need to withhold from an employee’s paycheck.

To file a Form W-2, you’ll need a few things. You’ll need to know the employee’s name and address. Additionally, you’ll need the employee’s social security number (SSN). You should have had all of this information from the Form W-4 that you collected upon hiring.

You’ll need to know the total amount of income that the employee earned throughout the year. You’ll also need to know how much you withheld in social security wages and Medicare wages. And you should know how much you potentially paid on behalf of the employee into things like union dues, health savings accounts, compensation plans, or retirement plans.

Businesses also need to know their employer identification number and state ID number to submit these forms. The employer identification number is a federal nine-digit number assigned by the IRS. The state ID number is similar, although the employer’s state assigns it.

Things to remember when filing

When filing a Form W-2, you need to make sure that each box on the form contains the correct information. Box A is for the employee’s SSN, while Box B is for the employer identification number.

Box D contains the W-2 control number. The control number is a unique code that identifies the form for your records. If you attempt to import your W-2 in your favorite accounting or tax software, then you’ll need this number. If your W-2 does not contain a control number, you’ll need to enter the information into your accounting software manually.

You’ll put the employer’s name, address, and zip code in Box C. You’ll add the employee’s name in Box E and address in Box F.

Box 13 is a checkbox where you’ll indicate whether the employee is a statutory employee, whether they have a retirement plan, and whether they earned third-party sick pay. Statutory employees are independent contractors who are treated as employees due to certain exemptions. Third-party sick pay is a disability benefit that insurance companies pay in case workers miss time due to a non-work-related injury.

Other boxes are for employee wage information. For instance, you’ll see:

  • Box 1: Wages, Tips, Other Compensation
  • Box 2: Federal income tax withheld
  • Box 3: Social security wages
  • Box 4: Social security tax withheld
  • Box 5: Medicare wages and tips
  • Box 6: Medicare tax withheld
  • Box 7: Social security tips
  • Box 8: Allocated tips
  • Box 9: Blank
  • Box 10: Dependent care benefits
  • Box 11: Nonqualified plans
  • Box 12: Cost of employer-sponsored health care
  • Box 13: Various checkboxes
  • Box 14: Other notes
  • Box 15: Employer’s state ID number
  • Box 16: State wages, tips, etc.
  • Box 17: State income tax
  • Box 18: Local wages, tips, etc.
  • Box 19: Local income tax
  • Box 20: Locality name

Ready to file W-2 employee forms?

Are you ready to bring your first employee on board? Let’s get started with our interactive W-2 employee form. We’ve color-coded the form so that you can easily see employee-related data, employer-related data, and data fields that are often used. Having this form on file is a crucial aspect of the business once you start hiring employees. We make sure that you and your employee will fill the forms out correctly the first time.

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