Form W2 vs 1099 - What’s
the Difference?

1. What is Form W-2?

Form W-2, also known as the Wage and Tax Statement, is used by businesses to report employee compensation, benefits, and the amount of taxes withheld from the employee's paycheck during the year. Businesses are required to file Form W-2 for each employee (who are classified as full-time or part-time employees) if they have paid $600 or more and withheld taxes during the year. Additionally, a copy of the form must be submitted to the SSA before the deadline.

2. What is Form 1099?

Form 1099 is a collection of tax return statements used to report various types of compensation and payments made to individuals who are not classified as employees. These non-employees encompass freelancers, independent contractors, self-employed individuals, and other non-payroll professionals.

Businesses and individuals have an obligation to file Form 1099 for these non-employees if they have provided compensation or wages for services rendered and have not withheld taxes as they would under a typical employer-employee agreement. Form 1099 should be filed with the IRS, and a copy should be distributed to recipients before the deadline.

3. Form 1099 vs W2 employees: What’s the difference?

The primary difference between 1099 employees (often referred to as independent contractors) and W-2 employees (regular employees) lies in their employment status, tax treatment, and the way they are classified by the employer. Here are the key distinctions:

4. Form W2 vs 1099: What's the difference?

The W-2 Form and 1099 Form are used to report income earned by employees; however, there are some major differences that distinguish each form. Here are the key differences between the Form W-2 and 1099 forms:

5. How to determine an independent contractor ?

The major difference between an W-2 employee or independent contractor is the degree of control the business has over the employee. To determine whether a worker is an independent contractor, the IRS employs a set of criteria that assess the degree of control the business has over the worker. This evaluation involves considering the following factors:

• Behavioral Control: Whether your business has control or the right to control how the worker performs their job. Factors such as instructions given, training provided, and the degree of supervision all play a role in determining the level of behavioral control.
• Financial Control: Are the business aspects of the worker’s job controlled by the payer? These include considerations like the method of payment, reimbursement of expenses, and who provides necessary supplies.
• Type of Relationship: Examines the nature of the relationship, looking at aspects such as the existence of a written contract between the parties, the permanency of the relationship, and whether the worker is entitled to employee-type benefits.

These elements help in determining the distinction between an employee and an independent contractor.

6. Can an individual get both a W-2 and a 1099?

There are instances where an individual may receive both a Form W-2 and a 1099. One such scenario arises when a person holds a dual role within a corporation, functioning as both an officer and an employee while also serving on the board of directors. In this situation, they would receive a W-2 for employee compensation and a 1099 for the fees earned in their capacity as a corporate director, which is classified as a non-employee position.

Additionally, an individual may obtain both types of information returns from the same company within the same tax year. This can happen if an independent contractor providing services to the company is subsequently hired as an employee. In such a case, the individual would receive a 1099 for payments received during their tenure as an independent contractor and a W-2 for payments once they join the company's payroll.

7. Why is it important for employers to correctly classify workers?

Ensuring the accurate classification of workers is crucial for employers due to various legal and financial implications. Misclassifying employees can lead to several significant consequences:

• Financial Penalties: Incorrect classification may result in the need to repay wages, employment taxes, and other potential penalties. In cases where misclassification is deemed intentional or fraudulent, penalties can be as severe as 20 percent of wages paid, along with the entire FICA amount, including both the employee and employer shares.
• Personal Liability: Owners can be personally held liable for income taxes and the employee share of FICA that should have been withheld, amplifying the financial burden and personal risk.
• Criminal Penalties: The IRS might pursue criminal penalties of up to $1,000 per misclassified worker, emphasizing the seriousness of the consequences related to worker misclassification.
• Department of Labor Penalties: Apart from IRS penalties, the U.S. Department of Labor can also impose its own penalties for the misclassification of workers, further complicating the financial repercussions for the business.

To avoid potential penalties, businesses can explore options such as seeking Section 530 relief, which provides a safeguard against employment tax penalties if payments to contractors have been consistently reported on 1099s and there is a reasonable basis for their classification as independent contractors. Additionally, employers can consider the IRS' Voluntary Classification Settlement Program (VCSP) as a means to voluntarily reclassify contractors as employees, thereby minimizing penalties and ensuring compliance with tax obligations.

8. Form W2 vs 1099 workers: How do tax rates differ?

The tax rates for 1099 and W-2 workers differ significantly due to variations in the tax obligations of employers and independent contractors.

For employees who receive W-2s, the employer is responsible for paying half of the Social Security and Medicare (FICA) taxes, which amounts to 7.65 percent of the employee's wages. The remaining 7.65 percent is withheld from the employee's paycheck by the employer and submitted to the IRS.

On the other hand, independent contractors who receive 1099s are liable for the full 15.3 percent self-employment tax on their earnings. Unlike W-2 employees, independent contractors are considered self-employed individuals and are responsible for both the employer and employee portions of the FICA taxes, which include the Social Security and Medicare taxes.

9. Form W2 vs 1099: When is the deadline to file?

The deadlines for filing Form W-2 and Form 1099 depend on whether you're an employer or a payer, and there are some exceptions for specific types of 1099 forms:

• Form W-2: Employers must file Form W2 with the Social Security Administration (SSA) and provide a copy to their employees by January 31st of the following year. For instance, for income earned in 2024, employers need to provide Form W-2 to employees and file it with the IRS by January 31, 2024.
• Form 1099: For most Form 1099 categories, payers must provide Form 1099 to the recipients (such as independent contractors or vendors) by January 31st of the following year. A copy of Form 1099 should be submitted to the IRS by the last day of February (February 28) if filing by paper or by March 31 if filing electronically.

However, there are some exceptions to these deadlines:

• Form 1099-NEC: Both the recipient copy and the IRS copy should be filed with the IRS by January 31st.
• Form 1099-MISC (Box 8 or 10): If payments were reported in Box 8 or 10 of Form 1099-MISC, the deadline to distribute recipient copies is February 15th.
• Form 1099-B and Form 1099-S: The deadline to distribute recipient copies for these forms is also February 15th.

Note: If any of the deadlines falls on a public holiday or weekend, the deadline moves to the next business day.

10. How to File Form 1099 and W-2 with TaxBandits?

With TaxBandits, filing your W-2 and 1099 forms becomes a swift and straightforward process. In just a few easy steps, you can ensure tax compliance. TaxBandits offers features like bulk upload, internal audit checks, TIN matching, and the convenience of e-filing for both federal and state copies. You can distribute recipient copies through postal mail or online access, accommodating your recipients' preferences.

Additionally, TaxBandits streamlines vendor onboarding with its W-9 management tool, simplifying the collection and integration of vendor 1099 information into your returns. Overall, TaxBandits is a comprehensive solution that makes tax form filing efficient and hassle-free.