The difference between a W-2 and 1099 comes down to whether the person doing work for you is an employee or an independent contractor. If you’re paying a self-employed independent contractor you’ll use the 1099 and you’d use a W-2 if you are paying your employees.
If you’re paying self-employed independent contractors, you need to report payments to the IRS with Form 1099-NEC (switched from 1099-MISC in 2020). However you only need to do this if you paid them more than $600, their business entity isn’t a C corp or S corp, and you didn’t pay them with a credit card.
Also, for independent contractors who you need to file a 1099-NEC, you need to make sure you get them to fill out a Form W-9 when they start their work so you know how to fill out their 1099-NEC.
The 1099-NEC lets you tell the government how much you paid any non-employee contractors so that they ensure the individual pays Uncle Sam the appropriate amount come tax time.
If you’re paying an employee, you need to report all compensation for that employee on a Form W-2. You’ll need to send each employee a W-2 and also send a copy to the IRS and the Social Security Administration (SSA). The W-2 reports an employee’s annual wages and the amount of taxes withheld from their paychecks. The employee’s tax withholding amounts are based on the elections they made on their IRS Form W-4 when they started their job.
Employers are required by law to send W-2s to every employee and they must be sent before January 31st of the following year to allow ample time for the employer to prepare their taxes.
As an employer, you’re required to withhold taxes from your employees’ paychecks. Typically this is handled by a payroll tool and will feel pretty automatic. Most payroll platforms will also generate both W-2s and 1099-NEC forms for you as well, but you may be responsible for sending them to the IRS and your employees.
Non-employee contractors are individuals who you don’t direct how a task will be performed, but you direct the result of the work. They typically get paid a flat-fee of some sort. They will also pay their own taxes for earnings they make. You are responsible for reporting how much you paid the independent contractor, but you aren’t responsible for withholding or paying taxes on their behalf.
An employee on the other hand, is an individual who generally works for one company, their work is controlled by the employer, they do work integral to the business, and they are paid a salary or hourly wage.
The IRS also provides three categories to help determine if an individual should be classified as an employee or an independent contractor. The categories are:
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how a worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
For more detailed information about the difference between an independent contractor and an employee, checkout the IRS website.
Disclaimer: Any articles written on this website, including this article, are not to be taken as legal or HR advice. Employment laws are constantly changing and vary by location and industry. You should consult a lawyer or HR expert for guidance. Need HR advice? We can help!