W-2 vs 1099: What’s the Difference and Which Do Your Workers Need?
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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.
Issued to employees
Issued to contractors
Universal form for all types of employee compensation
1099-NEC for nonemployee compensation and 1099-MISC for miscellaneous compensation
Filed with SSA and the IRS
Filed with the IRS only
Form W-2: what is it and who gets one?
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.
What is Form W-2?
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.
Who gets Form W-2?
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: what is it and who gets one?
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.
What is Form 1099-NEC?
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.
What is Form 1099-MISC?
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.
Who gets Form 1099?
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.
What's the difference between 1099 contractors and W-2 employees?
Let’s zoom in to understand the nuanced differences between these two types of employees.
What is a W-2 employee?
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.
What is a 1099 contractor?
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.
How to determine if a worker is an employee or an independent contractor
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.
Type of relationship
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
1099 vs. W-2 taxes: what taxes do employees and contractors pay?
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.
W-2 payroll taxes
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:
- FICA taxes (Medicare and Social Security): Employers and employees each pay 6.2% of the employee’s wage for social security taxes and 1.45% for medicare taxes
- FUTA (Federal Unemployment Tax): Employers pay 0.6% of the first $7,000 they pay an employee (the rate is 6%, but most employers are eligible for tax credit if they pay this tax on time)
- SUTA (State Unemployment tax): Employers pay SUTA taxes (sometimes called SUI) at different rates in different states
Related: are you a small business owner managing payroll on your own? Check out our guide on small business payroll and taxes for help.
1099 self-employment taxes
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.
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Form W-2 vs. 1099: tax document comparison
Employers and workers fill out and file forms W-2 and 1099 in different ways.
What information and copies does the W-2 require?
Form W-2 has six copies:
- Copy A: employer sends to the Social Security Administration, or SSA
- Copy B: employee files with the IRS for tax return purposes
- Copy C: employee keep in their records
- Copy D: employer keeps in their records
- Copy 1: employer files with tax authorities if asked
- Copy 2: employee files with tax authorities if asked
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.
What information and copies does the 1099 require?
Form 1099 has two copies: A and B.
- Copy A: employer submits to the IRS
- Copy B: contractor keeps in their records
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.
When are the 1099 and W-2 due?
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.
Where do you file each form?
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.
When to hire W-2 employees vs. 1099 contractors
Each type of worker can benefit your business in different ways.
Hire W-2 employees when...
- You want greater control and oversight over your employees
- You want clear ownership rights to the employee’s work
- You want your employees to work exclusively for your business
- You want your employees to work with your equipment and tools of choice
- You don’t want to worry about misclassification risks
- You want to attract talent by offering great employee benefits package
Hire 1099 contractors when...
- You want to give a potential hire a trial period
- You need to hire someone to work on a particular project for a limited period of time
- You have a sudden increase in workload, but can’t afford to hire a full-time employee
- Your business is an industry with high employee turnover
- You only need a one-time expert consultation about an aspect of your business
- You want to hire foreign workers without setting up a local entity or hiring through an EOR
FAQs about 1099 vs. W-2
Do contractors get tax refunds?
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.
1099 vs. W-2 employee: which is better for employees?
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.
Do 1099 contractors pay more taxes?
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.
How do you switch employees from 1099 to W-2?
To convert your independent contractor to an employee, follow these steps:
- Propose a new business arrangement to your contractor
- Choose how you’ll hire them if they’re not residents of your country
- Prepare new tax documentation
- Create a new contract and have your new employee sign it
- Add the employee to your payroll
- Onboard your new employee and welcome them to the team
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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.
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