W2 vs 1099: Key Tax Differences

Introduction

Correctly completing Forms W-2 & 1099 will help you safeguard your company. These forms are used to report employee payroll tax withholdings and contractor payments.

The IRS (Internal Revenue Service) requires firms to report payments for work completed by submitting information returns. Whether the service provider is an employee or an independent contractor determines the kind of information return that is used for this reason. It is the company for which the job is done that must complete the information return. By using these forms, the IRS can verify that suppliers of services are accurately reporting worker earnings and that the business is paying payroll taxes for service-givers who work for the company.

What makes 1099 vs W-2 forms different?

What is included on the Form 1099 is the primary distinction between it and the W-2:

• Only payments made to independent contractors are subject to the 1099-NEC. This form is used to record no tax payments.
• The W-2 is a more thorough information return that includes taxable payment to employees, Federal (along with, where applicable, state) income tax, FICA (Federal Insurance Contributions Act) withholding, salary reduction amounts for contributions to 401(k) plans and certain other worker benefit plans, and other withholding (for example, paid medical and family leave benefits in some states, or state disability compensation in others), as well as different employee benefits (such as health coverage, group term life insurance, and dependent care support).

Form W-2 is used to report wages as well as additional payments to employees, and Form 1099-NEC is used to report payouts to independent contractors. Each company must consider whether its personnel are independent contractors or employees in order to submit the proper form.

Compared to hiring employees, engaging independent contractors may be less expensive for employers. Savings are derived from avoiding the cost of independent contractors’ employment taxes and benefits, as well as from lower administrative expenses. Classifying workers is more than just a choice, though.

For federal tax reasons, if the business has adequate control over the time, location, and method of work, the worker is considered an employee and cannot be considered an independent contractor. More precisely, the IRS determines whether a person is an employee for purposes of taxation based on certain behavioral, monetary, and relational factors.

On the other hand, independent contractors are basically self-employed workers. They often utilize their own equipment and tools, have some degree of discretion over when and in what manner their work is completed, and take an interest in each assignment’s profitability.

What is a Tax Form 1099-NEC?

The gross total of payments given to an independent contractor over the calendar year is shown on a 1099-NEC form, which is a yearly information return. If an independent contractor receives more than 600 dollars in compensation during the year, the company for whom those services were rendered is required to file. Nevertheless, even with lower contributions, it can still be filed.

Employers are most impacted by two types of 1099 forms: 1099-MISC and 1099-NEC. If you’re thinking about when to utilize a 1099-MISC versus a 1099-NEC, here’s where they differ:

• As of the 2020 income year, companies that pay workers on contract in the prior tax year use IRS Form 1099-NEC, which is the contracted worker tax form. The IRS receives it, and the contractor uses it to report their income.
• Previously intended for disbursements to independent contractors, Form 1099-MISC is now utilized for royalties, rent, and other income payments.

1099 Workers: Who are they?

A 1099 worker, also known as an independent contractor, is a person who enters into a service agreement with a business. As we’ll cover later, companies need to properly classify their employees. Here are a few instances of the kinds of employees that might receive a 1099 form, though it’s advised to ask an HR expert or attorney to confirm the correct classification.

1099 Worker Examples

• An outside expert hired for a specific duration to finish a project A self-employed web developer who works on a project-by-project basis and utilizes their own laptop.
• An electrician was hired three times a year to fix an office building’s power failures.

How to complete a form 1099-NEC

For contractors, filling out a 1099-NEC form is rather easy.

1. Provide your name, address, & the total sum you paid the contractor on Form 1099. The following details regarding your contractor must be obtained from their Form W-9:

• • Legal name
  • Name of business
  • Individual address
  • Taxpayer Identification Number or Social Security Number
  • Payment information from the previous fiscal year

2. By the due date, submit Copy A to the Internal Revenue Service (IRS).
3. Forward Copy B to the contractor you hired.
4. Save Copy C for the records of your company.

When to send out a Tax Form 1099-NEC?

Usually, you would give a 1099 form to people or companies that rendered some services but are not your employees. Independent contractors are often employed in situations when there are predetermined start and finish times for an assignment or project, no assurance that the job will be continuous or ongoing, no set time, or the task can be completed without supervision.

When do 1099s need to be filed?

According to IRS regulations, independent contractors who get over 600 dollars in non-employment pay in a single year must have their employers file 1099-NEC by January 31 of the subsequent year. The IRS receives Form 1099-NEC together with the employee or company that provided the services.

What additional forms are required when dealing with independent contractors?

You must have more than just Form 1099 on hand in order to pay & tax your contractors correctly.

IRS W-9 Tax Form

A contractor’s TIN (taxpayer identification number) is requested by a business using a W-9 form. This guarantees that the contractor’s company or the right person receives payments and that the IRS has correct data when it comes time to file. The contractor’s Social Security number (SSN) or an EIN (employer identification number) may be the TIN listed on the form. This independent contractor tax form should be retained on record for a period of four years in the event the IRS or the contractor has any questions.

• Who fills out Form W-9? The W-9 should be filled out by the independent contractor and sent back to the company along with any other information that has been requested.
• When is the right time to fill out Form W-9? It should be finished by contractors when they first begin working with a company.
• What is the Form W-9 submission deadline? W-9s are not subject to an IRS filing deadline. Instead, the company that pays the independent contractor is responsible for keeping the form up to date and using the information provided to guarantee that the right amount is paid.

IRS Form 1096 (Tax)

Form 1096 is an executive report of a company’s informative returns. Independent contractors are not provided this form; it is solely submitted to the IRS.

• Who fills out Form 1096? Form 1096 would be prepared by the same organization that prepares Form 1099. When filing on paper, this form must be filled out and sent in with the business’s informative returns. IRS Publication 1220 contains instructions for electronic filing.
• When is the deadline for completing Form 1096? When the 1099-NEC documents for non-employee payment are due at the conclusion of the business year, they should be finished.
• What is the Form 1096 filing deadline? The deadline for Form 1096, which summarizes 1099-NEC forms that record non-employee compensation, is January 31. Other informational files may have different due dates, so it’s important to check every year when making your tax filing calendar.

W-2 tax forms: What are they?

Employees receive a yearly return of information called Form W-2 that details their taxable income, income tax withholding, and Medicare and Social Security tax withholding. The form also details state income tax deductions and a variety of employee benefits, some of which are taxable and others of which are tax-free. Regardless of the total amount of compensation provided throughout the course of the year, the employer is required to file it for every employee.

W-2 Employees: Who are they?

An individual who receives their salary through their company’s payroll and has payroll taxes deducted throughout the year is known as a W-2 employee. The W-2 worker gets a Form W-2 by January 31 that contains details about their taxable income, tax deductions, and any further tax deductions for advantages like 401(k) plans or employer-sponsored medical coverage from the previous year. The W-2 worker then completes their annual taxes using this data. Examples of workers who might be given a Form W-2 are shown here.

W-2 Employee Examples

• An employee in an office with set hours, continuous work, a laptop provided by the business, and an immediate manager
• A warehouse manager with weekly schedules and ongoing training
• An administrative worker with defined duties, health insurance via an employer-sponsored health plan, and a 9 AM–5 PM workday

How to complete a W-2 Form

You don’t need to search further to learn how to manually complete a W-2 and what every section on the form means.

• Box A: SSN (Social Security Number) of the Employee
• Box B: EIN, or Employer Identification Number
• Box C: Name, place of residence, and ZIP code of the employer
• Box D: Number of controls. If control numbers are not used in your company, leave this box empty.
• Boxes E to F: Name, place of residence, and ZIP code of the employee
• Box 1: Wages, tips, and other forms of payment. The entire sum that you paid the employee over the course of the year is referred to here. There is a federal income tax on it. Health insurance payments, pre-tax retirement contributions, and additional pre-tax benefits for workers are not included.
• Box 2: Withheld federal income tax. Depending on the employee’s filing status and total taxable income, this box indicates the amount of federal income tax that has been deducted from their paycheck.
• Box 3: Income from Social Security. The salaries of the employee liable to Social Security taxes are displayed in this box. The Social Security salary base for 2025 is $176,100, therefore this amount shouldn’t be higher than that.
• Box 4: Withheld Social Security tax. This is the sum that is deducted from the worker’s Social Security income. This figure shouldn’t go above $10,918.20 (6.2% x $176,100) for 2025.
• Box 5: Wages and tips for Medicare. This is often the same amount as that shown in Box 4.
• Box 6: Withheld Medicare tax. The employee must pay 1.45% percent of their wages in Medicare taxes.
• Box 7: Tips from Social Security. Refers to the quantity of tips that the worker received and, if any, reported. This amount shouldn’t be higher than $176,100 in 2025.
• Box 8: Tips that were allocated. If applicable, include the amount of money you gave this employee in tips.
• Box 9: Don’t fill up this box.
• Box 10: Benefits for dependents: If you offered this employee dependent care help through a program, list the total sum of benefits you gave them.
• Box 11: Plans that are not qualified. This option notifies the employee of the employer’s payments through a non-qualified deferred pay plan. Box 1 should likewise contain this sum.
• Box 12: Codes. You might need to include a few codes here. These codes have the potential to reduce the employee’s taxable income.
• Box 13: Checkmarks. Just check the boxes that correspond to the worker: Third-party sick leave, retirement plans, and statutory employees.
• Box 14: Others. Incorporate sums and related information about additional payments & deductions.
• Box 15: Employer’s ID number of State | State: Both your state EIN and your state of business should be noted.
• Box 16: Tip money, state wages, etc.. It refers to the wages of the employee that are taxable by the state. This value might or might not be identical to the one in Box 1. Leave this area empty if the staff member works in a state where there is no state income tax.
• Box 17: Withheld state income tax. Depending on the employee’s filing status and total taxable income, this box indicates the amount of state income tax that has been deducted from their pay.
• Box 18: Tips, local wages, etc. The total amount of taxable wages that are liable to local taxes on income are as indicated. If there isn’t any local income tax in the area where the staff member works, leave this field empty.
• Box 19: Local tax on income. This box indicates the amount of local income tax that has been deducted from the worker’s pay in accordance with their filing status and total taxable income.
• Box 20: Name of the locality. The city or locality’s name that is relevant.

When a W-2 form should be issued?

Every employee whose paychecks you paid over the year and had certain taxes withheld from them must receive a Form W-2.

By the last day of January of the year that follows, employers are required by IRS regulations to provide a Form W-2 to each employee who served for them during the previous year. The SSA (Social Security Administration) must receive copies of W-2s at this time as well.

Can a person receive both a 1099 and a W-2?

Occasionally, a W-2 and a 1099 might be issued to the same individual. Consider the following scenario: a person who works for a corporation as an officer simultaneously serves on the company’s board of directors. If such is the case, this individual might obtain a 1099 for payments earned as a director, which is a non-employee role, and a W-2 for worker payment.

How to submit W-2 Forms?

Providing originals to employees and sending copies to government agencies are the two duties that businesses have when filing W-2s. Ensure that you adhere to the regulations regarding providing workers with their documents. For instance, if prior authorization is obtained, an employer may electronically deliver an employee’s W-2 rather than mailing or giving it to them; that way, the employee will be able to see the W-2 when it is sent.

The company’s W-2s must be electronically sent to the SSA if the number exceeds 250. A small employer, however, might decide to do so in order to guarantee accuracy and save time. The copies need to be sent with Form W-3. It is necessary to mail copies to the SSA along with a transmittal document if electronic submission is not utilized.

How to submit 1099 forms?

Independent contractors may receive 1099 forms electronically if they agree to receive them. If the business has more than ten 1099s, they have to be sent electronically to the IRS.

Employers who use the FIRE (Filing Information Returns Electronically) system to file electronically must register in order to do so.

Why is it crucial that employers accurately classify their employees (1099 vs W-2) for the IRS?

Small firms must accurately classify their employees in accordance with the IRS test and other criteria that determine whether a person is appropriately categorized as an independent contractor for the purposes of local, state, and federal employment laws & regulations. Paying past salaries, employment taxes, and even unpaid employee benefits (such as health insurance and retirement plan payments) can be the consequence of misclassifying a worker as an independent contractor.

Unpaid employment taxes resulting from worker misclassification may incur significant IRS fines. The IRS usually looks back for taxes that haven’t been paid for three years.

Unpaid employment taxes resulting from worker misclassification may incur significant IRS fines. The IRS usually looks back for taxes that haven’t been paid for three years.

• Penalty for failing to submit a necessary Form W-2 (2024): Each form costs $60 if submitted within 30 days of the deadline; if submitted after 30 days but before August 1st, it costs $130; if submitted after August 1st, it costs $330. Each year, these fine amounts might be modified to account for inflation.
• Penalties for not deducting wages: Interest is added on 1.5% of salaries.
• 40% is the employee’s portion of FICA.
• 100% is the employer’s portion of FICA.
• Tax nonpayment: 0.5% of the monthly unpaid tax obligation (up to twenty-five percent of the entire tax obligation).

Let’s say the IRS believes the misclassification was false or that your company had no intention of owing employment taxes. In that scenario, fines may consist of 20% of earnings paid in addition to the full amount of FICA (the employer and employee share). For income taxes as well as the employee portion of FICA that ought to have been deducted, owners may be considered personally responsible.

Additionally, the IRS may pursue criminal charges of a maximum of $1,000 for each worker who is misclassified. Additionally, the United States Department of Labor has the authority to enforce its own sanctions for misclassifying workers.

Avoiding employment penalties for taxes may be possible with Section 530 relief. As long as companies have regularly reported workers, reported payouts to freelancers on 1099s, and have a legitimate justification for treating workers as independent contractors, they can escape employment tax fines brought on by worker misclassification. Under the IRS’s VCSP (Voluntary Classification Settlement Program), contractors can also choose to voluntarily reclassify as employees in order to reduce penalties.

1099 vs W-2 Employee Classification Tests

A number of your employees may be wondering if they are legally considered independent contractors, freelancers, or employees.

Common Law Rules of the IRS for 1099 vs W-2

In order to ascertain whether a worker satisfies the appropriate federal tax requirements for employees and independent contractors, the IRS applies guidelines.

• Control over behavior: Does your organization oversee and manage employees’ work? Is the employee given specialized training and guidance?
• Financial control: Is the worker given supplies and tools, compensation for expenses, and payment methods by the employer?
• Relationship type: Is the employee given an agreement in writing or other perks that indicate their importance to the company?

Answer all three of these queries truthfully, considering the responses as a whole; no rule is more important than any other. Classifying the person as an employee is safe if you’re still unsure.

Economic Reality Test by the DOL for 1099 vs W-2

The Department of Labor also offers assistance with worker classification.

In conclusion, and according to the DOL, the following criteria ought to aid in classification:

• Profit or loss potential based on managerial ability
• Investments made by the employer and employee
• Enduring nature of the professional connection
• Type and level of control
• Whether the job is essential to the employer’s operations
• Ability and initiative

Classification of EEOC Employees (1099 vs W-2)

To decide if a worker is an employee, the U.S. Equal Employment Opportunity Commission establishes its own rules. Along with numerous elements that are comparable to those mentioned above, some other criteria to take into account are:

• Is the worker able to employ and compensate assistants?
• Is the employee involved in a different line of employment or business?
• Can the worker be fired by the employer?
• Do both the employer and the employee think they have a relationship with each other?

ABC Test by State for 1099 vs W-2

A number of states apply the “ABC test” to determine if an employee is eligible for state-specific benefits such as wage and hour regulations and unemployment insurance. Unless each of these three requirements is met, a worker is not considered an employee:

• Lack of control: The individual’s work is not specifically directed by the organization.
• Unusual business: The employee works off-site or in a different capacity from what is typically done by the company.
• Customarily engaged: The employee works on their own in a role that is comparable to what they do for the company, possibly for other companies or in another well-known trade.

Properly taxing W-2 and 1099 workers safeguard your company

You may keep your company out of problems with the IRS by properly classifying your employees and reporting payments that you make to them with the appropriate information. Your company can manage employee payments in accordance with IRS regulations with the assistance of a trustworthy payroll services provider.

Frequently Asked Questions: 1099 vs W-2

1. Does a 1099 qualify as a W-2?

A W-2 is not the same as a 1099. The main distinction is that the 1099-NEC is provided to independent contractors & non-payroll workers, whereas the W-2 is given out to employees who are on the corporate payroll.

2. Should a company file its 1099 and W-2 separately?

Individuals would include both the money they earn as a 1099 contractor and their W-2 earnings as an employee on their individual tax filings. Businesses that provide independent contractors with 1099-NECs and employees with W-2s should file and submit copies of each document to the relevant government agencies individually.

3. Which tax rate is applied to 1099 vs W-2?

When you have workers and give them W-2s, you, as the business owner, pay half of the 7.65% Social Security & Medicare (FICA) taxes and deduct the other half from the workers’ paychecks every pay period. Self-employment tax, which is 15.3% of income, is paid by contract workers who receive 1099-NECs.

4. Why is having a 1099 or W-2 required?

W-2s & 1099s are both required since the data on them is utilized to report significant earnings details to the relevant federal entities. A W-2 is necessary for an employee to appropriately submit both federal and state taxes. Independent contractors can use the data on Form 1099-NEC to submit their earnings to the IRS and calculate their proper tax obligations.