Taxes are procedures that worry many people, and this is due to the little knowledge they have about them, so people are often predisposed to the realization of these statements. This post will show you everything you need to know about tax returns and the differences between W-2 and 1099-NEC. We will teach you how to file a tax return and what type of people you should file, so relax and take notes so you can start reviewing the necessary documentation to get started with this process.
What is the IRS?
The Internal Revenue Service, better known as the IRS, is a federal agency of the United States government that ensures that tax laws are enforced to the letter and works as a tax collection agency. In addition, the IRS is an agency under the U.S. Department of the Treasury and is responsible for applying and interpreting acclaimed tax laws.
What is a tax return?
A tax return is an annual tax filing. This document is reported through a tax agency, where the income, deductions, and withholdings are diagnosed to make a declaration promptly. In conclusion, it is defined as the procedure that is delivered to the Treasury of how much money has been received by the business or labor activities.
Also, what is the percentage of the corresponding amount to contribute to collecting taxes, and how much will be returned or paid to the person? The declaration of taxes is a legal and obligatory act demanded by the State for better functioning and order for society and the labor area.
How to file a tax return?
To prepare a tax return, it is essential to identify what type of person you will declare, whether you will say as an employee or as an independent contractor. Below we will show you step-by-step how to file a tax return.
Steps to file a tax return
The first step is to gather the following documents:
- Form W-2
- Statements of other income and interest, with 1099 and 1099-INT forms.
- If a more detailed return is to be made, you should look for receipts for medical expenses, business, and charitable donations.
Se debe determinar el estado civil de la persona. Esto se basa realmente si la persona está casado legalmente, si es así entonces se debe sacar el porcentaje de los gastos del hogar.
- Then you must decide how you want to file your tax return. You can file in the following ways:
- According to the IRS or Internal Revenue Service, it is advisable to use tax preparation software; these are filed electronically, so it is easier to file accurately.
- A traditional way is to use paper and send it by regular mail to file your taxes.
- And the last one has to do with low-income, disabled, elderly, taxpayers with a low level of English, and members and family members of the Armed Forces. For these types of people, there is the possibility of free filing of tax returns as long as they meet the requirements.
- The individual must determine whether it is more convenient to take the standard deduction or file the itemized return.
- A business plan must be filed and taxes paid if money is owed to the IRS.
Who should file an annual income tax return?
U.S. citizens and permanent resident aliens who work in the country must file an annual income tax return if they have income over the amount due for each year. Even if the worker earns less income than what he/she was entitled to, he/she may also file a return, and if so, the missing amount may be refunded to him/her.
An individual can file a tax return to claim a refund of income tax withheld or a refundable tax credit. The IRS should be used to gain knowledge about whether or not to file a tax return.
On the other hand, non-resident aliens who are still working and earning money may be required to file a U.S. tax return. It is essential to mention that filing a tax return will depend on two things: the person’s source of income and his or her tax status.
What is a W-2?
The W-2 is a form that shows the wages or amounts paid and taxes withheld for the period of the employee’s year. It is essential to mention that the employee’s Medicare and Social Security benefits are calculated depending on the information contained in the W-2 form. Therefore, it is essential to fill out the form correctly and always on time.
The Internal Revenue Service or IRS needs workers to report their wage information and the exact amount of their salary. In addition to writing other details such as federal and state taxes, health insurance, dependent care, health savings accounts, adoption assistance, and more. All the information submitted on this form as an employee is essential for tax reporting.
The next correct date to receive a W-2 if you work as an employee throughout the year is at the beginning of the following year. If your employer has withheld taxes from your paycheck, you will also need to receive a W-2. If you want to know even more about this form, we invite you to read the following key points about it.
- First, the W-2 form contains basic tax information about your employer; this information is related to taxes withheld, income, benefits, and so on.
- The W-2 must be sent or submitted on or before January 31 of each year. It will be used to file your tax return.
- The Internal Revenue Service uses the W-2 form to keep an accurate account of your income during the year as an employee.
What is 1099-NEC?
Non-employee compensation, or NEC, constitutes compensation paid to a worker classified as a non-dependent contractor, not an employee. Especially businesses or companies must provide self-employed contractors with a form which is a 1099-NEC, if they charged $600 or more for their services in a given tax year.
Everyone who has a job must file taxes and report all income, regardless of the source of the revenue. Employees must file a W-2 form, but independent contractors or self-employed individuals must file non-employee compensation, also known as self-employment income.
The Internal Revenue Service rules that for a person to report the payments he/she makes, he/she must meet the following conditions:
- The payment must be made to a person who is not an employee.
- The payment made to the person must be related to the service, commercial activity, or business he/she has.
- The payment is made to a person, estate, corporation, or partnership.
- The total amount to be made is at least $600 per year.
Businesses or companies must file Form 1099-NEC if they pay an individual at least $10 in royalties. In addition, it competes whether the company or industry was withholding federal income tax under the backup withholding rules on interest and certain dividends, regardless of the number of payments made to nonemployees during the year.
Generally, these payers must file the forms on or before January 31. This has no extension dates unless the company or business has certain hardship conditions. The following terms must be considered for non-employee compensation:
- Commissions
- Fees
- Benefits
- Rewards or rewards for services rendered by a nonemployee
- Other forms of compensation for services rendered by a non-employee
It should be noted that there have been some updates to the 1099-NEC form, such as that self-employed individuals will not be able to see personal payments received during the entire year. However, they must report the payments made only for compensation related to any company or business commercial activity.
On the other hand, Form 1099-NEC reflects that clients do not withhold income taxes on payments made, as is reflected for employees. But that does not mean that the payer must wait until he prepares his tax return for him to pay 100% of his tax liability. Instead, he may be required to make up to four estimated tax payments to the Internal Revenue Service during the year.
The extent, consistency, and amount of estimated payments to be made will depend on the following points:
- The amount of income.
- The withholding of taxes from other income, employment, or business activity.
- It will depend on the method the individual chooses to calculate estimated taxes.
Differences between W-2 and 1099-NEC
The purpose of both forms is to report income generated throughout the year. Where the W-2 and 1099-NEC forms differ is the circumstances under which payments are received and how to comply with tax planning for tax time. In the case of employees, their employer must send them a W-2 form so that they can complete their tax return. On the other hand, the one who works as a non-dependent contractor may have to send the company a 1099-NEC form.
The main difference between the W-2 and 1099-NEC forms centers on tax withholding. This refers to the fact that employers withhold money from employees’ pay and then send it to various tax agencies throughout the year on behalf of each employee. On the other hand, self-employed workers do not have any payments withheld on their behalf by the company, business, or firm that requested their services but are responsible for making their estimated tax payments.
Benefits of filing a tax return
In some instances, there is a possibility that some of the money may be refunded to you; an example of one such case is if the employer withheld taxes from your employee’s paycheck; if this is the case, there is a chance that the employee will be reimbursed when they file their taxes. Other benefits are that you avoid penalties and the accrual of interest, your credits are more protected, and it will be easier for you to apply for and get bank loans.
In addition, you will be able to apply for assistance with education expenses effectively, your social security benefits will also increase, and you will be guaranteed the calculation of your help. Apart from all that, complying with the tax return law gives you a better and more accurate picture of every income. So don’t hesitate to file your tax return for a second; you will not only comply with the laws, but you will also get benefits as a worker.
