Understanding the Differences Between Forms W-2 and 1099
Employers issue W-2s and 1099s to their employees and contractors each tax season. Often, HR managers get asked about the difference between these two forms. If you’re a recruiter or a hiring manager, understanding the difference between these forms is the first step to hiring the right talent for a position.
Providing the wrong form to an employee could result in potential fines. Let’s look at the differences between Form W-2 and Form 1099 to avoid this issue. We’ll focus on forms 1099-MISC and 1099-NEC, as those are most applicable to employers. Finally, we’ll look at how to determine which form to use so you can recruit the right talent and maintain compliance during year-end processing.
Everything Employers Need to Know About W-2 Forms
Any business owner engaged in a trade or business who pays for services an employee performs must file a Form W-2 for each employee. Earnings include non-cash payments of $600 or more for the year. Here are some essential facts to know about W-2 forms:
- It’s different from a Form W-4, which tells employers how much tax to withhold from employee paychecks each pay period.
- It usually determines whether a person receives a refund or pays during tax season.
- Employers must provide employees with copies of their W-2s by the end of January each year.
From the first paycheck to the final payroll processed, that information populates Form W-2s. Form W-2s give employees an overview of their earned wages, any taxes withheld, and any deductions taken for items like retirement contributions or health insurance for that calendar year.
NOTE: Sometimes, the amounts shown on a Form W-2 differ from what’s reflected in a final pay stub for the calendar year. If so, you can utilize a resource like our W-2 Vs. Final Pay Stub Handout to explain the difference to your employees.
What is Form W-2?
The W-2 form, or Wage and Tax Statement, is a document that employers use to report the total annual earnings of an employee and the taxes deducted from their salary. Here are the critical components of a W-2 form:
- Employee Information: Includes the employee’s name, address, and Social Security number.
- Employer Information: Contains the employer’s name, address, and Employer Identification Number (EIN).
- Earnings: Details the total wages earned by the employee over the year, including salaries, bonuses, and tips.
- Tax Withholding: The federal, state, and local taxes withheld from the employee’s earnings.
- Benefits and Contributions: Lists contributions to retirement plans, health insurance premiums, and other benefits.
The information provided on a W-2 is necessary for employees to file an income tax return each year. In addition, employees can utilize this form to determine how much they owe the IRS or receive a tax refund.
Employers will also file Copy A of their employees’ W-2s with the IRS and a Form W-3, Transmittal of Wage and Tax Statements, to fulfill their tax filing obligations.
Note: If employees misplace their W-2, encourage them to visit the IRS website to get a copy of their W-2.
Who Gets a Form W-2?
Form W-2 is sent to any employee who earns at least $600 from an employer. Employers are required by law to file copies of W-2s with the IRS, Social Security Administration (SSA), and state and local tax authorities, if applicable.
Employers typically begin verifying employee information in October and November to prepare for year-end processing and the distribution of W-2s to employees. The type of information to verify includes:
- Social security numbers
- Employee names
- Employee addresses
Once this information has been verified or corrected, employers will prepare to generate W-2s to distribute in January. If an employer uses a provider that offers payroll tax compliance services, this process can be as simple as making W-2s available to employees in an online portal for easy access.
If an individual receives at least $600 from more than one employer, they must file all Form W-2s. If an employee only worked for an employer part of a calendar year, they must file that Form W-2 with the IRS.
Reporting W-2 Income for Employees
Employers must report employee incomes, deductions, and employer payments to the proper tax authorities. Therefore, you must withhold income tax and the employee portion of Social Security and Medicare taxes. Both employees and employers are subject to Medicare taxes and Social Security.
The Social Security rate is 6.2% for the employer and 6.2% for the employee (12.4% total). Conversely, the Medicare tax rate is 1.45% for the employer and 1.45% for the employee (2.9% total).
Employers are responsible for paying Social Security, Medicare, and unemployment (FUTA) taxes on employee wages.
What is a 1099 Form?
A Form 1099 shows that a nonemployer entity paid money to an individual. There are many different 1099 forms. They vary from interest and dividends to pensions and payouts from personal retirement accounts. Here are some essential facts to know about 1099 forms:
- Receiving a 1099 form doesn’t necessarily mean an individual owes taxes on that money.
- Employers must provide copies of Form 1099 to contractors or freelancers by the end of January each year.
- Employers must file Form 1099 with Form 1096, Annual Summary, and Transmittal of U.S. Information Returns.
Two of the most common 1099s are the 1099-NEC and 1099-MISC. These forms are typically issued to independent contractors or freelancers to report their wages without taxes withheld, such as Medicare and Social Security, to the IRS.
What is Form 1099-NEC?
Form 1099-NEC is used to report non-employee compensation totaling $600 or more. It allows employers to document payments made to independent contractors and freelancers accurately.
Who Gets a Form 1099-NEC?
Any individual who earns at least $600 from a business that does not count them as an employee must receive a Form 1099-NEC for tax purposes. Employers are legally required to file copies of 1099s with the IRS, Social Security Administration (SSA), and state and local tax authorities, if applicable.
Employers typically verify information in October and November to prepare for year-end processing and distribute 1099s to contractors and freelancers. The type of information to verify includes:
- Social security numbers
- Contractor names
- Contractor addresses
Once this information has been verified or corrected, employers will prepare to generate 1099s for distribution in January. If an employer uses a provider that offers payroll tax compliance services, this process can be as simple as mailing 1099s directly to contractors for added convenience.
Reporting Income for 1099-NEC Workers
Employers may be required to provide Form 1099-NEC to report what independent contractors get paid. Because businesses don’t withhold income taxes for 1099 workers, withholdings, Social Security, and Medicare are not reported on Form 1099-NEC. Contractors are responsible for paying their income tax and self-employment tax.
What is Form 1099-MISC?
Form 1099-MISC is used to report alternative miscellaneous fees. Those payments must be at least $600 towards the following:
- Rents
- Prizes and awards
- Other income payments
- Medical and health care costs
- Crop insurance proceeds
- Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish
- Generally, the cash comes from a notional principal contract to an individual, partnership, or estate
- Payments to an attorney
- Any fishing boat proceeds
Since Form 1099-NEC reports non-employee compensation, Form 1099-MISC and the box numbers on it report certain other incomes:
- Box 7 – Payer made direct sales of $5,000 or more
- Box 9 – Crop insurance proceeds get here
- Box 10 – Gross proceeds to an attorney get here
- Box 12 – Section 409A deferrals get here
- Box 14 – Nonqualified deferred compensation income gets reported here
- Boxes 15, 16, and 17 – State taxes withheld, state identification number, and the amount of income earned in the state gets reported in these boxes
W-2 and 1099 Deadlines
Deadline to Send Forms to Employees & Contractors | Deadline to File W-2 With Social Security Administration | Deadline to File 1099 MISC with Social Security Administration |
|---|---|---|
January 31st | January 31st: Employers should file forms along with a W-3 transmittal | January 31st: Employers should file forms along with a 1096 transmittal |
The Difference Between a 1099 and W-2 Employee
There is one key difference between a W-2 form and 1099. A Form 1099 is issued to an independent contractor to report their income to the IRS. They pay their taxes since they are self-employed. A Form W-2 is given to employees to report their income and payroll taxes withheld.
Employment Status
- W-2: Issued to employees by their employers, who withhold taxes from employees’ salaries and forward those withholdings to the appropriate tax authorities.
- 1099: Issued to independent contractors or freelancers responsible for paying their taxes.
Tax Withholding
- W-2: Employers withhold federal, state, and local taxes from employees’ paychecks.
- 1099: Independent contractors must withhold taxes themselves and pay estimated taxes quarterly.
Benefits and Protections
- W-2: Workers frequently qualify for health insurance, pension schemes, and unemployment benefits.
- 1099: Independent contractors typically do not receive benefits from the payer.
Filing Requirements
- W-2: Employers must file W-2 forms with the SSA and provide copies to employees by January 31.
- 1099: Payers must file 1099 forms with the IRS and provide copies to recipients by January 31.
What’s The Difference Between an Employee and W-2 Employee?
Employees are usually W-2 workers. However, some employers with long-term agreements might internally refer to these workers as employees.
How you’re classifying your employees and independent contractors determines which form you’ll use. Let’s examine how the IRS classifies workers to understand this process better. According to the IRS, an employee is anyone who performs services for you if you can control what tasks occur and how they get executed.
For example, if a worker performs tasks on a full-time basis, requires minimal assistance due to experience, and their work is subject to a supervisor’s approval, that person is an employee.
The IRS defines an independent contractor as anyone who offers their services to the general public. This definition includes doctors, dentists, lawyers, and accountants. If the payer has the right to control or direct the work’s result, not what gets done or how it’s performed, that worker is an independent contractor. However, distinguishing whether a worker is an employee or an independent contractor depends on each case’s facts.
Types of 1099 Workers
You can provide 1099s to several different types of workers. Knowing the difference between these workers can help you in your recruiting process. It will also help you maintain compliance when distributing tax forms each year.
Here is a list of the most common types of 1099 workers and how they differ from each other:
Freelancers
These individuals often work with organizations on a per-project basis. Some freelancers work with multiple businesses simultaneously, maximizing their earning potential. In addition, they usually choose when they can and can’t work and set their rates.
Consultants
Like freelancers, these individuals are self-employed. However, the difference lies in their skillset. Often, these individuals have unique or highly crafted experiences, education, and training that make their knowledge invaluable. Their knowledge frequently leads to opportunities to help companies strategize as needed. These workers usually demand high compensation for their time and efforts.
Independent Contractors
If an evaluation system is in place that measures performance, then these factors would indicate an employee. However, if the evaluation system only measures the result, this could mean either an employee or an independent contractor.
Gig Workers
These individuals are similar to freelancers; however, their offerings and payouts differ. Usually, these workers opt to perform small jobs. As a result, they are often paid per task completed.
How to Determine if a Worker is an Employee or Independent Contractor
Accurately classifying employees and contractors is vital for federal tax purposes. Worker classification impacts how you pay employer taxes and how your employees pay theirs.
To determine the classification of your employees, the IRS has provided questions to ask so you can maintain compliance. Here are the three categories the IRS looks at when making employment classifications:
1. Behavioral Control
Behavioral control demonstrates whether you have the right to direct or control how workers complete their tasks. If a business has a right to direct or control task completion, the worker gets classified as an employee. The employer does not have to handle how the work gets done as long as they own the work itself. Behavioral control falls into the following categories:
Type of Instructions Given
If the worker receives extensive instructions on completing the work, that person may be an employee. Instructions can include:
- When and where to do the work
- What tools or equipment to use
- What workers to hire or to assist with the work
- Where to purchase supplies and services
- What work must be performed by a specified individual
- What order or sequence to follow when performing the work
If the worker receives less extensive instructions about the tasks to complete and more critical information on how to complete the job, the worker may be an independent contractor. For example, time and place may be less important than how the actual work gets performed.
However, the amount of instruction will vary depending on the work performed. Even if an employer gives no instructions, behavioral control may exist if the employer has the right to control how the individual achieves the work results.
Degree of Instruction
If the worker receives less extensive instructions about the work to complete but not how it should be done, the worker may be an independent contractor. For example, time and place may be less important than how the actual work is performed.
However, the amount of instruction will vary depending on the type of work performed. Even if an employer gives no instructions, behavioral control may exist if the employer has the right to control how the individual achieves the work results.
Evaluation System
If an evaluation system is in place that measures performance, then these factors would indicate an employee. However, if the evaluation system only measures the result, this could mean either an employee or an independent contractor.
Training
If an organization wants the work done a certain way, this factor suggests the worker is an employee. Furthermore, if there is periodic or ongoing training about procedures and methods, this is more substantial evidence of an employee. Independent contractors and freelancers typically have their own processes.
2. Financial Control
Financial control refers to facts that determine whether or not an employer has the right to control the economic aspects of the worker’s job. Financial control factors include the following categories.
Significant Investment
Independent contractors often invest significantly in their tools and equipment when working for someone else. However, in certain occupations, workers spend their own money on equipment and are still considered employees.
There is no specified dollar amount to meet to have a significant investment. In addition, some work types do not require large expenditures, so substantial investment is unnecessary for independent contractor status.
Unreimbursed Expenses
Independent contractors are more likely to have unreimbursed expenses. However, some employees may also incur unreimbursed fees connected with the services they perform for their business. Therefore, it’s also essential to consider fixed ongoing costs incurred whether work is currently performed or not.
Opportunity for Profit or Loss
If a worker has made a significant investment in the tools and equipment used and has unreimbursed expenses, the worker has a greater opportunity to lose money. The possibility of incurring a loss indicates that the worker is an independent contractor.
Services Available to the Market
Independent contractors often advertise, maintain a visible business location, and work in the relevant market. As a result, they are typically free to seek additional business opportunities.
Method of Payment
An employee is usually guaranteed a regular wage amount for an hourly, weekly, or another period. This reoccurring wage payment generally indicates that a worker is an employee, even when a commission supplements the wage or salary.
An independent contractor is typically paid a flat fee for the job. However, it is common in some professions to pay independent contractors hourly.
3. Type of Relationship
Type of relationship refers to facts about how the worker and employer perceive their relationship. These factors include the following categories:
Written Contracts
A written contract is not enough evidence to determine a worker’s status. Instead, how the parties work together determines whether the worker is an employee or an independent contractor.
Employee Benefits
Employee benefits include insurance, pension plans, paid vacation, sick days, and disability insurance. Businesses do not typically grant these types of benefits to independent contractors. However, the lack of these benefits does not necessarily mean the worker is an independent contractor.
Permanency of Relationship
If the expectation is for a worker-business relationship to continue indefinitely, this is typically considered evidence that the intent was to create an employer-employee relationship.
Work relationships with a defined amount of time or a specific project could indicate the worker is an independent contractor.
Services Provided as Key Activity of the Business
If a worker provides services that are crucial to the business, it is more likely that the employer will have the right to direct and control their activities. For example, if a company hires a graphic designer, it is expected to present the designer’s work as its own and have the right to control or direct that work. Therefore, this factor would indicate an employer-employee relationship.
To better understand how this process works, consider diving into how the IRS classifies workers.
Additional 1099 and W-2 Resources
If it still needs to be determined whether a worker is an employee or independent contractor after reviewing these three categories of facts, file Form SS-8 with the IRS. This form is for the Determination of Worker Status for Federal Employment Taxes and Income Tax Withholding.
This IRS will review the facts of the situation and officially determine the worker’s status. This determination will help you better understand the difference between W-2 and 1099 pay so you can issue the correct forms to your workers.
For more information on the classification of workers, check out the following resources:
Choosing Who to Hire: W-2 vs. 1099 Workers
Now that you know a little about W-2s and 1099s, you’re probably wondering what type of worker your organization should hire. However, the answer to this question isn’t so simple. Before making this decision, consider your current talent pool, business needs, and HR recruiting strategy.
W-2 and 1099 workers can provide valuable skills and knowledge to an organization. It’s also possible to find qualified candidates in both pools. So, here are a few tips that can help you decide which type of worker is right for your business.
- Assess your current talent pool and look for gaps in skill sets.
- Analyze the job market and determine how easy it will be for you to find qualified candidates.
- Determine if you need a forever skillset or leverage shorter-term talent.
- Ask yourself and your managers how fast the worker needs to acclimate. For example, do you need to onboard a full-time employee, or does a freelancer who can immediately start work out better?
- Review your talent budget against currently available candidates. How do the salary and benefits of a full-time worker compare to hiring a contractor or alternative workers?
Common Questions About W-2 and 1099 Forms
Can you receive both a W-2 and a 1099 in the same year?
Yes, it is possible to obtain both forms if you have been employed as a regular employee and also performed work as an independent contractor.
What happens if I don't receive my W-2 or 1099?
Contact your employer if you are still waiting to receive your W-2 by mid-February. For a missing 1099, contact the payer. If you still do not receive the forms, you can use IRS Form 4852 (substitute for Form W-2) or IRS Form 1099-R (substitute for Form 1099).
How do I report income from a 1099 on my tax return?
Income from a 1099-NEC is reported on Schedule C (Profit or Loss from Business) and may require filing Schedule SE (Self-Employment Tax).
How APS Simplifies Tax Form Management
Managing and distributing tax forms can be complex and time-consuming, but APS is here to help. Our unified payroll and HR solution streamlines the process, ensuring accuracy and compliance. Here’s how APS can assist:
- Automated Tax Form Generation: Easily generate and distribute W-2 and 1099 documents to your workers and independent contractors.
- Compliance and Accuracy: Ensure all tax forms are accurate and compliant with federal and state regulations.
- Employee Self-Service: Allow employees and contractors to access their tax forms online anytime.
Practical Scenarios and Examples
Full-Time Employee with a Side Gig
Jane works full-time at a marketing agency and receives a W-2 form at the end of the year. She does freelance graphic design work on weekends, for which she receives a 1099-NEC. Jane must report both forms on her tax return, detailing her wages and non-employee compensation.
Freelancer with Multiple Clients
John is a freelance writer who works for several clients yearly. Each client provides him with a 1099-NEC form reporting the income paid to him. John must keep track of his income and expenses, filing a Schedule C to report his business earnings and a Schedule SE to pay self-employment taxes.
Employer with Mixed Workforce
XYZ Corp employs a mix of full-time employees and independent contractors. The company issues W-2 forms to its employees and 1099-NEC forms to its contractors. To streamline this process, XYZ Corp uses APS to automate the generation and distribution of these tax forms, ensuring timely and accurate filing.
Demystifying Tax Forms: W-2s and 1099s
Understanding the differences between W-2 and 1099 forms is essential for accurate tax reporting and compliance. By breaking down the key components and differences, we hope to clarify which form applies to your situation.
APS simplifies business payroll and tax form management, making handling these critical tasks easier. Contact us today for more information on how APS can help streamline your tax processes.
Sources
- About Form W-2, Wage and Tax Statement
- About Form W-3, Transmittal of Wage and Tax Statements
- What Is an IRS 1099 Form? What It Means, How 1099s Work
- Form 1096, Annual Summary and Transmittal of U.S. Information Returns
- Form 1099-NEC, Nonemployee Compensation
- Instructions for Forms 1099-MISC and 1099-NEC
