1099 vs. W-2 Forms: 3 Key Differences & How to File Them

One of the main differences between 1099 vs. W-2 forms is that 1099 forms are issued to independent contractors, freelancers, and non-payroll staff, while W-2 forms are distributed to full-time employees who are included in an employer’s payroll.

Whether you’re an employer, an employee, or a contractor, it is crucial to understand how to differentiate these two IRS tax forms to avoid making errors when filing your taxes and incurring possible penalties.

Keep reading to understand when to use a 1099 or a W-2 form, learn about the 1099 vs. W-2 tax differences, and ensure you regulate your tax obligations efficiently.

Key Takeaways

• The main distinction between the 1099 vs. a W-2 form is that the former is issued to independent contractors and non-payroll workers, while the latter is issued to salaried and payroll employees.
• There are several variations of 1099 forms, but the most recognizable ones are 1099-NEC, 1099-MISC, 1099-INT, and 1099-DIV.
• When comparing 1099 vs. W-2 taxes, 1099 form recipients shoulder the full rate of their FICA taxes, while W-2 employees share their Medicare and Social Security tax burden with their employers.

What is a 1099 Form?

A 1099 form is a cluster of different tax forms specifically used to report a variety of non-employer payments made within the tax year by an individual, a government agency, or a company that is not necessarily the recipient’s employer.

Taxpayers who usually receive and use a 1099 form in filing their taxes are freelancers and non-payroll workers. To give you a better idea about the main purpose of a 1099 form, here are the different types of them and their corresponding uses:

1099-NEC

The 1099-NEC is used to report payments to freelancers, independent contractors, and consultants worth $600 or more for their services. Before the IRS restored the 1099-NEC form for reporting non-employee payments, business owners used to fill in Box 7 of their 1099-MISC form to file non-employee compensation.

1099-MISC

The 1099-MISC is now primarily used to report miscellaneous payments or compensation such as royalties worth at least $10, rent, healthcare and medical payments, prizes, gambling winnings, crop insurance proceeds, and awards.

1099-DIV

A 1099-DIV is used by financial institutions, brokerage firms, and banks to report at least $10 dividends paid within the year. Ordinary dividends, qualified dividends, and non-qualified dividends are all reported using Form 1099-DIV.

What is a W-2 Form?

A W-2 Form, Wage and Tax Statement, is used to report the annual wages paid by employers to their employees, including all federal, state, and local taxes withheld from employee wages within the year.

Employers also use the said tax form to inform the IRS about any other voluntary deductions subtracted from their workers’ earnings that are declared on the latter’s paychecks. Examples of these deductibles include contributions to health savings accounts, retirement plan coverage such as 401(k)s and IRAs, and dependent care assistance.

Employers are required to send the Form W-2 to each of their employees on or before January 31st each year, in time for their workers and staff to verify and file their income taxes on or before the set tax filing deadline.

Note that as long as employers withhold taxes from their workers’ pay, they must furnish W-2 forms for both full-time and part-time employees hired by their business within the tax year, regardless of whether they work in-office or remotely.

On the other hand, it is possible for an employee to receive multiple W-2 forms if they worked for different employers or businesses at the same time or at different times in a year.

3 Key Differences Between 1099 vs. W2 Forms

Aside from their respective purposes, there are the following three key differences between the 1099 vs. a W-2 form that you should know about to ensure a seamless tax filing process:

#1. Instructions

The Internal Revenue Service (IRS) sets different instructions when furnishing and filing a 1099 vs. a W-2 form. These instructions encompass when to use each form, as well as the deadline for submitting a Wage and Tax Statement and a Form 1099.

For instance, both Form 1099 and W-2s from the recently completed tax year are supposed to be issued by January 31st of the following year and filed by employees, contractors, and non-payroll workers on or before April 15th.

But going into the specifics, employers must send a copy of their employees’ W-2 forms not just to their staff but also to the Social Security Administration (SSA) to aid in assessing each worker’s eligibility for the SSA’s programs for disability, survivors, and retirement.

As for filing 1099 forms, contractors may need to use Form 1040-ES to estimate their quarterly tax payments and then send the payments either through the Electronic Federal Tax Payment System (EFTPS) or by mail.

#2. Taxes

When it comes to 1099 vs. W-2 tax differences, 1099 forms do not detail or specify any withheld taxes from independent contractors or non-employee payments. However, recipients of 1099 forms use the said IRS document to report all income they received within the year and file their taxes.

Meanwhile, W-2 forms provide information on the Medicare and Social Security taxes withheld from each of their employees. If employers operate their businesses in states where state income tax payments are mandatory, then the state taxes withheld should also reflect on their workers’ Wage and Tax Statements.

There are also 1099 vs. W-2 tax rate distinctions worth noting, particularly when it comes to determining the FICA taxes that W-2 employees must pay versus the tax amounts that independent contractors have to shoulder.

W-2 employees share 50-50 FICA tax payments with their employers, meaning that they pay 1.45% for Medicare taxes and 6.2% for Social Security taxes. Independent contractors who receive 1099-NEC pay the FICA taxes in full—12.4% for Social Security and 2.9% for Medicare taxes.

#3. Recipients

Another key distinction between the 1099 vs. W-2 form is the recipient of each tax document. All payroll employees who were paid a minimum of $600 within the year by their employer should receive a W-2 form.

Employees who were paid less than $600 but had a percentage of their earnings withheld for tax purposes must also expect to receive a Form W-2.

As for the 1099 form, independent contractors who were paid at least $600 in non-employee compensation by a business, organization, or individual who is not their employer should receive a 1099-NEC.

Individuals who were paid or earned income not less than $600 in royalties, gambling winnings, rent, and other miscellaneous compensation should receive a 1099-MISC.

1099 vs. W2 Employees: Differences & Examples

There are also ways to distinguish the purpose of a 1099 vs. W-2 tax form based on the employees and recipients who use each tax document.

1099 Worker Examples

In truth, it is more suitable to refer to 1099 workers as either independent contractors, freelancers, self-employed workers, or non-payroll workers. After all, there are several variations of 1099 forms, and not all 1099 form recipients are contractors or freelancers.

That said, here are some common examples of contractors or freelancers who need 1099 forms to file their taxes:

• Freelancers. Freelancers take on project-based or short-term jobs. They typically follow flexible work hours and get paid either per hour or per project. Common examples of freelancers include writers, photographers, and designers.

• Contract employees. Contract employees are also referred to as independent contractors. The jobs they take on often come with a contract or agreement with a company or employer. However, they are not necessarily included in the company’s payroll.

• Gig workers. Gig workers are a type of freelancers or independent contractors who also take on light and temporary jobs, often alongside full-time employment. Delivery drivers, couriers, movers, construction workers, and rideshare drivers fall under this category.

W-2 Worker Examples

W-2 workers are full-time and part-time employees included in a company’s payroll system. They also have a portion of their gross wages or salaries withheld to pay for their federal, state, and local tax obligations.

Some examples of W-2 workers include:

• Office-based employees. These are employees who get paid fixed salary rates and are expected to follow a fixed schedule and a set number of work hours each week.

• Remote-based and hybrid employees. Remote-based and hybrid employees can either work full-time or part-time from the comfort of their home, office, or both. They may also have permanent positions in the company and receive fixed wages or salaries.

• Hourly employees. Hourly employees are workers who do laborious jobs or clerical work. Healthcare and retail workers, receptionists, and teachers also fall into this category.

• Employees in executive and managerial positions. Individuals in executive and managerial positions are those who oversee essential operations and supervise the different departments that comprise the business or company.

1099 vs. W2: Payroll Taxes

If you’re a business that employs an independent contractor or a freelancer, you don’t need to withhold payroll taxes on their behalf. At the same time, you are not obligated to provide or sponsor health and life insurance coverage or retirement plan benefits.

Self-employed individuals and independent contractors are responsible for calculating the taxes they owe to the IRS and double-checking all payments they receive within the tax year.

In other words, when you pay 1099 workers, all you need to do is specify the amount you paid in exchange for their services and send their 1099 form on or before the deadline.

In comparison, withholding payroll taxes such as FICA, FUTA, and SUTA is a must if you are employing salaried employees. Your employees need information on their withheld taxes to ensure they file their taxes correctly.

It is crucial to ensure accuracy when calculating each of your employee’s payroll taxes. One of the best ways to achieve and maintain this is by implementing an efficient payroll administration process that suits your company size and work setup.

1099 vs. W2 Forms: Filing Process & Penalties

Both independent contractors and salaried employees must have already received their 1099 or W-2 forms by January 31st.

Generally, 1099 and W-2 form recipients are also given until April 15 to file their tax returns.

However, the deadlines may slightly change depending on the type of 1099 form submitted. For instance, 1099-MISCs must be sent to recipients by February 1st and filed by February 28th or March 1st if electronic filing is used.

For employees who receive multiple W-2 forms in a single tax year, they must specify how they want to receive their W-2 forms to their current and former employers. Employees can opt to receive their Wage and Tax Statements by mail or email.

At the same time, they must ensure that all of their tax information is duly updated and that they take note of all important IRS tax deadlines.

There are also specific and corresponding penalties that set apart a 1099 vs. W-2 form. These penalties can result from the following errors:

#1. Misclassifying W-2 and 1099 Employees

If employers misclassify full-time employees, they could potentially face penalties worth 40% to 100% of the unpaid FICA taxes. Neglectful employers may also be charged penalties worth 3% of unpaid or under-compensated employee wages.

Employers who misclassify their W-2 employees as 1099 employees may also be subject to an I-9 form inspection or audit from the Department of Homeland Security, Department of Labor, and Immigration and Customs Enforcement (ICE).

#2. Late Filing or Filing Incorrect 1099 Forms

Late filing penalties apply when businesses and individuals fail to file 1099 forms on or before the set due date.

The penalty amounts differ depending on when the tax forms were filed. For instance, you must pay a $60 penalty fee for every corrected 1099 form filed within 30 days of the due date. Otherwise, you pay $120 per form if you filed more than 30 days after the due date but not later than August 1st.

If you filed the corrected forms or statements on August 2nd or later, or if you simply did not file the required 1099 tax form, then you are subject to paying $310 in penalties per form.

Businesses that fail to provide correct information on their recipient’s copies of their 1099 forms may face penalties as well. Mistakes in filing 1099 forms often have to do with not being able to provide all the necessary information on the form or furnishing a 1099 form with incorrect information.

#3. Failure to File W-2 Forms

The penalties for failure to file Form W-2 depend on the severity of the mistake made when filing the said IRS form. For instance, taxpayers who file their W-2 forms 30 days after the set IRS deadline may end up paying $50 to $270 per form or $556,500 to $3,339,000 per year.

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Final Thoughts

Knowing the key differences between 1099 vs. W-2 tax forms, whether it be in terms of their use, recipients, or specific filing instructions, keeps you from facing potential IRS penalties.

Aside from that, you can better assess possible tax deductions that you can claim depending on whether you work full-time, juggle different independent contractor jobs, or calculate the total taxes that you owe with better precision.

More importantly, if you’re an employer or a business owner, pinpointing when to issue or furnish a 1099 vs. a W-2 form ensures you protect the rights of your contractors and employees and avoid felony charges or auditsfrom the IRS and other concerned government agencies.

1099 Form vs. W2 Form FAQ

#1. Is it better to be given a 1099 form vs. a W-2 form as an employee?

Determining whether it is better to be given a 1099 form vs. a W-2 form as an employee depends on your preferred work setup and tax situation. It is best to enumerate and compare the 1099 vs. W-2 pros and cons.

For instance, a 1099 worker may be subject to more tax deductions. Meanwhile, a W-2 employee can enjoy more employer-sponsored health and retirement benefits and share the tax burden on their FICA taxes.

#2. Can a worker receive both a 1099 and a W-2 form?

Yes, a worker can receive both 1099 and W-2 tax forms, particularly if an employee juggles their full-time with a part-time or freelancing job. Unfortunately, the IRS highly discourages this setup because it could potentially lead to an IRS audit.

#3. How do I compare my taxes as an independent contractor vs. a full-time employee?

You can compare your taxes as an independent contractor and a full-time employee by using online tools like a 1099 vs. W-2 calculator. A 1099 vs. W-2 calculator enables you to estimate the amount of taxes you can possibly owe depending on your work situation.