In addition to submitting annual wage reports to workers and filing these reports with the Internal Revenue Service (IRS) or the Social Security Administration (SSA), employers need to determine whether someone who works for their company is an employee or an independent contractor and provide them with correct forms. Thus, it is important to understand the differences when it comes to Form W-2 vs Form 1099 and make sure to maintain compliance during year-end processing.
Overview of Form W-2 vs Form 1099
Form W-2 and Form 1099 are both information statements, but they have different purposes and represent different types of workers. To begin with, employers need to classify their workers as either employees or independent contractors. Also, a proper understanding of the differences between Form W-2 vs Form 1099 helps them reduce the chances of tax errors and potential fines.
1099 vs. W-2 Forms: Key Differences & How to Choose the Right One
As an employer, you may have different classifications of employees working for you. One of the challenges of managing these different employee groups is understanding what tax forms apply to each and how to remain compliant. Two of the most common types of employees include employees on your company’s payroll and independent contractors, which is where W-2 and 1099 Forms come into play. But what’s the difference between a 1099 and a W-2, and who receives each? Explore the differences between a W-2 Form vs. 1099 Forms below to ensure you remain compliant during year-end processing.
Key Differences Between Form W-2 and Form 1099
- Form W-2, Wage and Tax Statement, is a federal tax form administered by the IRS that discloses an employee’s taxable income for the year. This form is typically provided to full-time employees of a company.
- Form 1099 is another federal tax information return that employers provide to non-full-time employees, such as independent contractors or freelancers, to report wages paid outside of a taxpayer’s salaries, wages and tips.
- The primary difference between Form W-2 and 1099 is who receives each form. Both forms are used to disclose wages paid. However, Form W-2 is sent to full-time employees of a company, while Form 1099 is sent to non-employees receiving wages from a company, such as an independent contractor.
- Accurately classifying employees is essential for employers to maintain compliance and avoid potential penalties and fines.
- Utilizing payroll tax management services can help streamline and optimize tax form processing to save costs and maintain compliance with the IRS and state tax agencies.
Form W-2 vs. 1099
| Feature | Form W-2 | Form 1099 |
| Employment Type | Employee | Independing contractor, self-employed, freelancer |
| Who Receives the Form | Payroll employees, Social Security Administration | Non-employees, Internal Revenue Service |
| Purpose | Report wages, taxes withheld, and other compensation to employees | Reports income paid to non-employees |
| Tax Withholding | Employer withholds income taxes, Social Secuity taxes, and Medicare taxes | Payer does not withhold taxes, contractor is responsible for taxes |
| Payroll Taxes | Employer is responsible for paying half of FICA taxes (Social Security and Medicare) | Contractor must pay full self-employment taxes (FICA equivalent) |
| Filing Requirements | Employer issues a copy to each employee and files with the IRS | Business files with the IRS and provides a copy to the contractor |
| Filing Deadline | January 31 | January 31 |
A Deeper Look at Form 1099
Form 1099 is a tax information return that reports income received outside of wages, salaries and tips. There are three different versions, each with different purposes:
- Form 1099-NEC reports how much a business paid annually to nonemployees, including independent contractors;
- Form 1099-MISC reports a business’s miscellaneous payments; and
- Form 1099-K reports payment card transactions through third-party networks.
Form 1099 reports the income a business pays to taxpayers who are not full-time employees. Any employer who pays an independent contractor, freelancer, self-employed person or sole proprietor for services they provided must file Form 1099 with the IRS for each of them. At the same time, a nonemployee contractor who receives Form 1099 from an employer must report that income on their tax return.
Businesses issue Form 1099 for every nonemployee paid more than $600 in the calendar year, but it can be filed even if payments are less.
Individuals or businesses can receive Form 1099 for payments including some of the following:
- Services performed by someone other than an employee;
- Other income payments;
- Rent payments;
- Prizes and awards;
- Medical and healthcare payments;
- Payments to attorneys with exceptions; or
- Payments to a business like a limited liability company (LLC), sole proprietorship, or partnership.
However, corporations and S corporations, usually do not receive Form 1099.
Who Gets a Form 1099?
Non-employees, such as independent contractors and freelancers, receive Form 1099. Businesses or individuals who receive income not considered wages or salary are recipients of Form 1099, specifically:
- Independent contractors and freelancers: Employers who pay $600 or more to an independent contractor or freelancer for services provided during the tax year must issue a 1099-NEC Form to report non-employee compensation.
- Rent recipients: If a business pays $600 or more in rent to a landlord or property owner, the employer must issue a 1099-MISC Form to report miscellaneous income.
- Legal services: Lawyers and attorneys, regardless of their incorporation status, must receive a 1099-NEC form for all payments of $600 or more.
- Royalties: Individuals or entities receiving $10 or more in royalties will be issued a 1099-MISC Form.
- Interest and dividends: Individuals or businesses receiving $10 or more in interest or dividends from investments will be issued either a 1099-INT or 1099-DIV Form.
- Other income payments: If an employer pays $600 or more in prizes, awards, or other forms of compensation unrelated to employment must issue a 1099-MISC Form to the recipient.
When Should a Form 1099 Be Issued?
Employers must issue Form 1099-NEC on or before January 31 either electronically or by mail. Employers filing Form 1099-MISC on paper have until February 28. Failing to file by the deadline can result in penalties and fees.
An In-Depth Look at Form W-2
Form W-2, also known as the Wage and Tax Statement, discloses taxable income for the year and is generally provided for full-time employees of a company. This information is distributed to each person in advance of the annual federal tax filing deadline.
Employers need to prepare six copies of every Form W-2 issued to an employee. The first copy, Copy A, is sent to the SSA. The second copy, Copy 1, is sent to either a state, city or local tax department. And finally, the third copy, Copy D, is kept by the employer for their records. Employers also need to furnish Copies B, C, and 2 of Form W-2 to employees.
Form W-2 can be sent in either paper or digital form. Employers are legally required to keep these forms on file for at least four years and to complete an employment identification number (EIN) form. They also need to keep in mind that they are ultimately responsible for making sure Forms W-2 for all employees are mailed and filed by the IRS deadlines.
Who gets a Form W-2?
Form W-2 is issued to all employees of a company during a tax year and is compensated for their work. This includes both full-time, part-time and seasonal workers. A W-2 Form is issued if the employer withheld any income tax, Social Security tax, or Medicare tax from an employee’s wages.
As an employer, to determine how much taxes to withhold, you’ll need to know the differences between Form W-2 vs Form W-4. Employees complete Form W-4 at the start of employment or when they need to update their tax withholding information, whether from getting married or having children, to inform employers how much federal income tax to withhold from their paychecks. Employers use this information to accurately withhold taxes, where they then issue Form W-2 at the end of the year to report an employee’s wages and the amount of taxes withheld. Employees then use their Form W-2 to file their taxes.
When Should a Form W-2 Be Issued?
Federal law requires all employers to send Form W-2 to employees, no matter how low earnings or wages are. Failure to do so in a timely manner can result in significant fines for businesses. Employers must send Form W-2 on or before January 31 each year, so that employees have enough time to file their taxes before the deadline, which is April 15 in most years.
What if Your Employee is Issued Both a 1099 and a W-2?
When it comes to differences between Form W-2 vs Form 1099, it is important to note that the latter form is used for payments to independent contractors and no tax payments are reported. On the other hand, Form W-2 outlines not only taxable compensation to employees but also federal and, if required, Federal Insurance Contributions Act (FICA) and state income tax withholding. In addition to this, Form W-2 is used to report salary reduction amounts for contributions to 401(k) plans, certain employee benefit plans, other withholding, and various employee benefits.
There are situations when the same employee can receive both Form W-2 and Form 1099. This may happen if a non-employee who provides services to the company is hired during the year to be an employee. However, businesses should be extremely careful when it comes to changing worker classification and using Form W-2 vs Form 1099.
What Employers Should Know When Filing 1099 and W-2 Forms
While there is a difference between W-2 and 1099 Forms, there are several common requirements to keep in mind when filing these two tax forms. Some key points employers should know include:
- Difference between a W-2 vs 1099 employee: Employers must understand the difference between a W-2 and 1099 form and the types of workers these are intended for. Form W-2 is issued to employees on a business’s payroll, whereas Form 1099 is issued to non-employees, such as independent contractors.
- Correctly classifying workers: Employers and their HR and payroll teams need to know how to avoid the misclassification of employees, as misclassifying an independent contractor as an employee and vice versa can result in IRS penalties, back taxes and other legal issues.
- Filing deadlines: Employers must ensure the timely filing of W-2 and 1099 Forms. In most cases, these forms must be filed by January 31 to the IRS, with copies sent to employees and non-employees on the same date.
- Accurate information: Penalties and fees can also arise from inaccurate information provided on these tax forms. Employers should double-check that names, addresses, Taxpayer Identification Numbers (TINs), and Social Security numbers (SSNs) are correct.
- Electronic filing requirements: It’s important to note that larger employers with 250 or more W-2 or 1099 Forms must file these forms electronically.
- State filing requirements: Along with federal filing requirements, each state has its own filing rules and deadlines. Employers should check their state’s W-2 and 1099 requirements to ensure compliance.
Correct Employee Classification Matters to the IRS and To Your Bottom Line
Proper worker classification is essential for every business given that misclassifying an employee as a non-employee can result in increased tax bills and penalties for not paying the appropriate employment taxes and for using the wrong form. Businesses may also be subject to penalties for failing to take appropriate state withholding and deductions, and not making contributions to state disability and unemployment agencies.
To help employers prevent worker misclassification, the IRS offers guiding questions that can help clarify the nature of the worker’s engagement with the paying company. These questions revolve around the degree of control the company has and the level of independence of the worker and include three general criteria: behavioral control, financial control, and the relationship between the worker and employer.
To avoid worker misclassification and determine whether to use Form W-2 vs Form 1099, the IRS recommends evaluation of the entire relationship, consideration of the degree or extent of the right to direct and control work, and also documenting each of the factors used to make the determination.
In addition to this, employers can consider outsourcing payroll tax management and optimizing tax form processing. This ensures proper handling of workers and payments comply with IRS rules and puts an end to any tax errors and the resulting penalties.
Tests Used for 1099 vs W-2 Employee Classification
One of the common challenges of navigating a W-2 Form vs 1099 Form is knowing how to classify workers. There are several tests employers can use to accurately identify whether a worker is considered an employee, an independent contractor, or a freelancer.
- IRS common law rules: The IRS has three common law rules that define the degree of control:
- Behavioral: Does the employer control or have the right to control what the worker does and how they perform the job?
- Financial control: Does the employer control the business aspects of the worker’s job, such as how the worker is paid, who provides the tools and supplies, and whether expenses are reimbursed?
- Type of relationship: Is there a written contract or benefits, such as a pension plan, insurance or vacation pay, that the worker receives? Will the working relationship end when the job is complete?
- DOL economic reality test: The Department of Labor has a test to determine whether a worker is an employee or independent contractor, assessing factors such as:
- Degree of control
- Opportunity for profit or loss
- Investment in equipment or materials
- Skill and initiative
- Permanency of the relationship
- The extent of how integral the work performed is to the business
- Equal Employment Opportunity rules: The Equal Employment Opportunity Commission has a test to classify employees vs non-employees, which includes factors like:
- The relationship between the parties
- How the worker is paid
- Who provides the tools, materials and equipment
- Where the work is performed
- The level of skill and expertise of the worker
- The employer’s right to assign additional work
- Whether the employer assigns working hours and job duration
Penalties Associated With Incorrect Management
There are various information return penalties employers may be subject to for non-compliance and incorrect management of 1099 and W-2 Forms, including:
- Failure to file on time: For 2024, filing up to 30 days late results in a $60 penalty for each return, a $120 penalty for returns 31 days late through August 1, a $310 penalty for returns filed after August 1 or not filed and a $630 penalty for intentional disregard.
- Incorrect or incomplete forms: A penalty for incomplete or incorrect forms can vary depending on how quickly corrections are made.
- Failure to provide forms to the recipient: Employers can face penalties for failing to issue copies to recipients, which follow the same penalty structure as filing late with the IRS.
Important Deadlines to Know With Regard to W-2 and 1099
To avoid penalties and interest, understanding the important deadlines for W-2 and 1099 Forms is essential. The most important deadline is January 31, which is when all W-2 and 1099 Forms are required to be filed and issued to employees, non-employees, the Social Security Administration, and the IRS. The one exception is February 28, which is when paper 1099-MISC Forms are due.
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To ensure accurate and timely tax compliance, turn to Experian Employer Services. Our tax management solutions streamline year-end reporting to ensure you issue and file your tax forms on time and to the right recipients. Refer to our payroll tax forms employer guide for more detailed information on your obligations as an employer, and book a demo today to see how our services can help.
