Article
3 min read
Author
Owen Yin
Published
September 28, 2021
Last Update
July 24, 2024
Table of Contents
Form W-2: what is it and who gets one?
Form 1099: what is it and who gets one?
What's the difference between 1099 contractors and W-2 employees?
How to determine if a worker is an employee or an independent contractor
1099 vs. W-2 taxes: what taxes do employees and contractors pay?
Form W-2 vs. 1099: tax document comparison
When to hire W-2 employees vs. 1099 contractors
FAQs about 1099 vs. W-2
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Around 90% of all taxpayers in the US pay a professional to do their taxes because forms, rules, and deadlines are overwhelming.
Business owners have to deal with the same complex system. US employers must give tax forms to every one of their workers, regardless of worker status. Depending on whether they’re independent contractors or employees, these workers must fill out and file different tax forms to the Internal Revenue Service (IRS).
In this article, we’ll explain the difference between the tax forms W-2 and 1099 so you’ll know which one to issue to your workers.
Every employee of your company receives a W-2, or the Wage and Tax Statement form. This form is the reason why full-time workers are sometimes called W-2 employees.
Form W-2 is an IRS tax form that employers use to report a full-time employee’s income and income tax withholding from their salary in the previous year.
The employer fills out this form for each employee. Employees then file their W-2 with the IRS as a part of their tax return to receive any tax refunds they may be entitled to.
Only full-time employees of a company receive the W-2 tax form. These employees are on the company’s payroll: they receive pay stubs consistently and don’t need to send their employers invoices to get paid.
Employees can see their gross pay and net pay on these pay stubs. Gross pay involves the mandatory benefits and taxes employers pay for their full-time employees, while net pay refers to the amount of money an employee takes home.
Form 1099 is a tax form used to report independent contractors’ income throughout a year. There are several types of 1099s, depending on the type of payments contractors receive. The most common 1099s are 1099-NEC and 1099-MISC.
Contract workers are often referred to as 1099 employees, but this term isn’t correct since contractors aren’t technically employees. However, contract workers have this nickname because of the tax form they fill out, Form 1099.
Form 1099-NEC is an IRS tax form for independent contractors introduced in 2020. It reports nonemployee compensation: the income generated by independent contractors, freelancers, and sole proprietors who work with clients.
Before 2020, companies reported this income in a box on Form 1099-MISC. But the IRS reintroduced the 1099-NEC to streamline the reporting process.
Form 1099-MISC reports miscellaneous income generated by independent contractors, freelancers, and sole proprietors. This income includes, for example, royalties, rent, payments to an attorney, awards, etc.
All non-employee workers who receive at least $600 in a year from a client business receive Form 1099. One contractor can receive multiple 1099s if they work with multiple clients.
Sometimes, an employee may also receive Form 1099, usually if they started as a contractor but became their full-time employee. The employer has to send both 1099 and W-2 tax forms in that case.
Let’s zoom in to understand the nuanced differences between these two types of employees.
A W-2 employee, known as a full-time employee, is a person hired by a company under a standard employment contract. This contract usually offers a salary, mandatory employee benefits, income tax withholding, protections like minimum wage and workers’ compensation, and other perks and benefits.
Unlike independent contractors, W-2 employees must abide by company rules, codes of conduct, work hours, and holiday schedules. The employer manages a full-time employee’s workload and provides training, tools, and equipment for the employee to perform their job.
A 1099 contractor is an independent, self-employed worker who sells their services to client companies as non-employees. Contract workers have a high degree of control over their work, setting their own hours and using their own equipment. In exchange, independent contractors do not receive employee-type benefits.
Companies usually hire independent contractors for specific projects and for a limited, short time. But companies can also hire independent contractors for extended projects, such as web design or advertising, depending on business needs.
The most important aspect of hiring 1099 workers is taxes. Independent contractors pay their own taxes and provide their own benefits like healthcare. You essentially pay the worker for their services. All other business expenses, such as equipment and licenses, are the worker’s responsibility.
Want to hire an independent contractor? Check out our independent contractor agreement guide to learn how to create an iron-clad written contract. Or, check out our guide to hiring foreign independent contractors to learn how to bring on overseas help.
The IRS offers guidance on some factors that help determine whether a worker is an independent contractor or a W-2 employee. These factors are:
Does the company control how the worker does their job? If so, the worker is most likely considered a W-2 employee. If the company only controls the result of the work, the worker is most likely an independent contractor.
Does the company reimburse expenses to the worker? Does the company influence the overall financial stability of the worker’s business? Does the company provide tools and equipment for the worker? If the answer to these questions is no, the worker is most likely an independent contractor. If the answer is yes, the worker might be considered a W-2 employee.
Does the worker get typical employee benefits such as days off, retirement plan, and health insurance? Is a worker’s job a vital aspect of the payer’s business? Is the relationship long-term, or does it end once the job finishes? If the benefits are covered by the employer and the relationship is ongoing, the worker is most likely a W-2 employee.
If you are still unsure about a specific case of worker classification, you can get a bottom-line determination from the IRS by filing Form SS-8
Read more about employee misclassification and legal and financial penalties that may follow.
One of the main differences between 1099 contractors and W-2 employees is that contractors pay self-employment taxes and don’t enjoy employee benefits that W-2 workers receive.
Payroll taxes refer to taxes withheld from an employee’s paycheck as a part of income tax withholding. These federal and state income tax payments fund government services like unemployment insurance.
Payroll taxes include:
Related: are you a small business owner managing payroll on your own? Check out our guide on small business payroll and taxes for help.
Self-employment taxes refer to taxes that independent contractors and freelancers pay on their own. The rate is the same: 15.3% total (12.4% for social security and 2.9% for medicare).
However, 1099 workers can deduct the employer-equivalent portion of their self-employment taxes as the IRS considers it a business expense. Only 92.35% of a contractor’s net income is subject to self-employment taxes.
Self-employed individuals also need to pay quarterly estimated taxes if they earn more than $1,000 per year through self-employment, based on how much they earn throughout the year. Due dates for these taxes are in January, April, June, and September.
Employers and workers fill out and file forms W-2 and 1099 in different ways.
Form W-2 has six copies:
W-2 form includes employer’s and employee’s identification information, such as the employee’s social security number or taxpayer identification number (TIN), and the employer’s identification number (EIN). It also includes employee’s personal information, as well as income information like taxable wages, tips, bonuses, tax withheld from the employee’s wages, and dependent and deduction information.
Form 1099 has two copies: A and B.
Form 1099 contains the contractor’s personal information and TIN, as well as the company’s ID number (EIN). It reports the amount of money earned as nonemployee compensation and federal income tax state tax withholdings in the case of backup withholding, which is a rare exception. Remember, client companies do not withhold taxes from independent contractors.
Tax filing due dates vary every year. In 2022, the due date to file your taxes is April 18. The employer had to send their workers all necessary tax forms by January 31st.
If you don’t use a specific service that allows you to file tax forms electronically, you can use Business Service Online’s website to e-file your taxes. You can also file the forms physically with the IRS.
Each type of worker can benefit your business in different ways.
Yes, 1099 workers get tax refunds. There are several deductions independent contractors may be eligible for, such as home office expenses, car and travel expenses, business licenses, and more.
There is no straight answer to this question. Some employees prefer job security instead of chasing clients, while others value flexibility and independence. Your choice depends on how you assess your current situation and priorities.
There’s no general rule as to whether contractors pay higher taxes. It may seem that way, given that they don’t have employers who cover a part of FICA taxes, but their total tax owed may decrease after deductions.
Check out our guide to independent contractor taxes for more information.
To convert your independent contractor to an employee, follow these steps:
Collecting tax documentation, calculating the taxes, and filing tax forms for your international workforce may be complicated, but it shouldn’t be an obstacle in hiring employees and independent contractors from other countries. While it can be overwhelming figuring out the best processes for paying out international salaries, there’s a solution for you. Deel.
Deel makes paying your team simple. With one mass payment and a click, you can fund and pay your entire global team on time and in minutes, keeping track of income tax along the way.
To learn more about payment options on Deel, book a demo today.
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