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Income Tax Filing Guide for Small Business and Self-Employed

Income Tax Filing Guide

Understanding Your Tax Forms

Tax forms can be overwhelming to anyone, and the two most commonly known and utilized forms are Form W2 and Form 1099-MISC.

Although there are instance that the two are frequently interchanged since both serve as information returns, they still differ on the functions they serve and work status of the person. For one, Form W-2 is for wages and salaries while Form 1099-MISC reports different kinds of income.

Both tax forms are utilized by workers but lines can be blurry especially when determining whether the person is employed or an independent contractor. By virtue:

  • Employees are people working for a company earning wage with their Social Security, state benefits and insurances are withheld by the company
  • Independent contractors, also known as freelancers, consultants, and free-agents are working for a company but aren’t considered an employee. They are also earning wage but nothing is withheld. And unlike employees, they have to shoulder all taxes.

Knowing which classification to fall under is vital since IRS penalizes misclassification. And to further understand the distinction of the two, here’s an in-depth discussion.

Form W-2

  • W-2 form, also known as Wage and Tax Statement, is filed by employees to disclose:
    • Wages, tips, and other compensation paid to the employer
    • Advance earned income payment
    • Employee’s income and Social Security taxes that is withheld
    • Report wage and withholding information to the employee and Social Security Administration, who shares the information with the Internal Revenue Service (IRS)
    • Companies are required to provide (4) Form W-2 to their employees usually by the end of January, after the tax year. (4) copies are issued essentially for local, state, and federal income and the last one as personal copy.

Form 1099-MISC

  • Form 1099-MISC is filed by independent contractors to disclose:
    • Miscellaneous income, royalties, rental income, and commissions
    • Payments and transactions made with a unincorporated business or another person who is not an employee
    • Payments of $10 or more in gross royalties or $600 or more in rents or compensation
    • Report payment information to the Internal Service Revenue (IRS) and the person or business that received the payment
  • Independent contractors are mandated to receive and file this form when the company they are working for pays more than $600 a year for their services
  • Although an independent contractor paid less than $600 per year for their services need not to prepare Form 1099-MISC, he/she is still required to file the for regardless if he/she received the form from his/her employer or not.


Form 1099-Misc: for independent contractors

The form reports all non-employee compensations and payments an independent contractor earns from another person or company to which he/she provides his/her services to. It covers, income of independent contractors and self-employed, royalties, insurance proceeds, and other miscellaneous incomes.

Filing Form 1099-MISC

Just like a regular employee, an independent contractor files a federal tax return but in another manner. Since payments come from different clients and companies, they are classified in different boxes depending on the reason behind the payment.

Also, filing for tax as an independent contractor is different from filing as an employee. For example. the payment earned from a client is not a main source of income, it will be included in other payments which can be found on the first page of the tax return.

Another example would be being identified as self-employed. If the independent contractor works for a relatively longer period within the tax year, then he/she will be considered by the IRS as self-employed, which is different from independent contractor because he/she must file his/her 1099-MISC on a Schedule C attachment to their return.

Finally, since the income of an independent contractor isn’t withheld, he/she is liable for his/her Social Security taxes, medical insurance, and other taxes that commonly withheld in an employee’s income.

Who issues the form?

Any business who hired services apart from his/her employees is required to issue 1099-MISC. An independent contractor may receive multiple Form 1099-MISC depending on the number of clients or businesses he/she is working for. Also, the employer is the one responsible to fill up the form but the contractor will be the one to submit it to the IRS.


The current threshold for 1099-MISC is $600 and more in payment for independent contractors or unincorporated businesses. The payment isn’t solely for the services but may also include rent, insurance, benefits, etc. All payments made by the employer to the payee will be added up and if amounts to $600, the employer is required to issue 1099-MISC. Otherwise, the employer doesn’t need to issue the form.

However, if the contractor is earning, for example $600, from 15 different companies, he/she must still file the 1099-MISC even if he/she doesn’t receive a separate form from the 15 companies.


Independent contractors have more benefits than an employee especially in claiming deduction relating to work profession. Also, since independent contractor’s wage isn’t withheld, they already know exactly what they owe which makes estimated tax payments easier and less payment in federal income tax.


If the business hires a foreign independent contractor and will be working outside the US, the company need not to issue Form 1099-MISC. But if the contractor will be operating within the US territory, issuance of the form is necessary

Payments made to corporations that outsources the services you need doesn’t require issuance of the form.

If the payment to the unincorporated business or independent worker is done electronically, Form 1099-MISC isn’t required

A business is only required to issue the form is the work is done for the company and not for personal purposes.


Employers are required to issue Form 1099-MISC on or before January 31 of the following year, but if it falls on a weekend, the deadline will be moved to the next applicable business date.

Filing for Form 1099-MISC to IRS is due on March 2nd if done manually and March 31st if electronically filed.


W2 Form: for employees

Form W-2 is is an annual report of an employee’s total amount of salary, wage, tax withheld for federal tax return, and other compensation given by the company. The form serves an important person in tax return.

Every year the IRS requires every employee to pay tax bills in a monthly basis which is why the employers withhold certain amounts from an employee’s paycheck to pay-off those tax bills. However, the amount being withheld for federal income tax which will be deducted from from your tax bills and subsequently be remitted after filing your tax. The withheld amount is reflected on the W-2 form essentially for applicable refunds

Who issues the form?

The form issued by the employer which is used by the employee in his/her filing of federal tax return by the end of the year. Six copies are prepared by the employer for his/her employees. The first three copies: issued before January 31

  • Attached to federal tax return
  • State or local income tax and other relevant taxing authorities
  • Personal copy

and the other three copies goes to: issued before Feb 28

  • For Social Security Administration, along with Form W-3
  • For applicable state or local tax department
  • Retained by employee


Just like Form 1099-MISC, an employer who pays his/her employees at least $600 (including taxable benefits) must issue the form to his/her employee.

Filing Form W-2

The form divided into two sections: one for the state and another would be for federal since employees are mandated to file both state tax and federal tax. There are also spaces for employer’s personal information and other details of previous income, which is very important to the IRS

Moreover, it has several boxes corresponding to one’s income. For example, there’s a box for annual wage and salary payments with the withheld federal tax from it. There are also boxes for income subject to Social Security tax, Medicare tax and other taxes withheld from your income.


  • The first three copies that will be used for personal consumption must be issued to the employees on or before January 31.
  • The remaining three copies for official purposes must be made available on or before February 28.
  • Social Security Administration requires submission of the form by March 2, along with W-3 form if filed manually.
  • These deadlines give ample time for employees to file individual taxes which is due on the 15th of April.


Why Tax Filing Compliance is a Must

The IRS penalizes late submission of tax returns as well as companies, too who fail to submit the W-2 Form and 1099-MISC Form on time, both to the relevant offices and departments, as well as to their employees and contractors.

There are instances wherein companies fail to adhere to deadlines regarding the submission of tax forms, which can be detrimental, not just financially but its credibility especially when it has a good record of submitting on time. Tardiness comes with a price, and penalties for late W-2 Form and 1099-MISC Form are somewhat the same.

Penalties for late and erroneous W-2 and 1099-MISC Forms

  • $100 – $250 if failure to file is intentional
  • $30 – $250,000 ($75,000 for small businesses) per form if filed within 30 days of the due date
  • $60 – $1,500,000 ($500,000 for small businesses) per form if filed 30 days after the due date and $500 dollars (for companies) or $200 (for small businesses) if filed on August 1
  • $100 – $1,500,000 ($500,000 for small businesses) per form if filed after August 1 and $100-$500 per form for small businesses.

But if the company foresees that it won’t be able to make the deadline, a request for extension can be filed by contacting the IRS or through Form 8809, also known as Application for Extension of Time to File Information Returns, but must be done before February 28.

Aside from late submission, incorrect or incomplete forms (but correction can be made upon notifying the IRS)

  • $30 per form if corrected within 30 days after filing
  • $60 per form if corrected 30 days after filing, but before August 1
  • $100 per form corrected after August 1

Other errors can be fined, such as:

  • No or incorrect Taxpayer’s Identification number
  • Filing manually when the company is required to file electronically
  • Using non machine-readable forms

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