1099 vs. W-2: What’s the Difference?

Anyone working in payroll would agree that there’s a lot to keep straight when it comes to ensuring your company complies with all the laws that govern the financial end of the business. 

Misclassifying an employee can be costly, so knowing who gets a 1099 tax form and who gets a W-2 tax form is vital. In this article, we will tell you the difference between the two and who gets which to help you comply with all laws governing tax withholding. 

What is a 1099?

A 1099 is the tax form that you give to independent contractors only. 

How do you know if they are an independent contractor? Here are some characteristics to keep an eye out for:

• They are self-employed
• You work with them under a contract for a specific role or task
• They set their own hours
• They use their own tools and equipment
• They work for more than one business

It’s important to classify an independent contractor correctly because when it comes to withholding taxes, they are different from a regular employee. An independent contractor’s paycheck does not have taxes withheld by your company because they are not employed by you - they are self-employed. As such, they will pay their own taxes and provide their own benefits every year. 

Some examples of employees you might give a 1099 to include freelance writers, gig workers, consultants, and freelance designers.

What is a W-2?

While also a required tax form, a W-2 is for a different kind of worker. W-2s should only go to employees. Employees usually:

• Have an employment agreement with the company
• Have a full or part-time schedule set by the company
• Are offered some kind of benefits opportunity

A W-2 needs to be filled out for every employee who was paid at least $600 for the year regardless of whether they are considered full-time or part-time. One must also be filled out for any employee who had taxes withheld from their paycheck, no matter their yearly salary. 

Some examples of employees who would get a W-2 include staff writers, project managers, and delivery drivers. 

Ashley Explains... the Difference Between Employees & Independent Contractors

Why Misclassification Should Be Avoided

Classifying workers correctly between employees and independent contractors is vital to staying in compliance with all state and federal tax laws. 

If a worker is classified as an independent contractor when they are, in fact, an employee, it’s more than just a matter of giving them the wrong form. It means you aren’t paying unemployment and other taxes on your workers. They are not covered by worker’s compensation and unemployment insurance. 

All of this means that if you are found to be misclassifying employees, you will need to repay all the taxes and benefits that were not being paid before. This means you will likely have to reimburse employees for overtime wages, pay back taxes and penalties, and provide back pay for all benefits you weren’t paying before. 

Looking for more articles to help you with all those all-important tax forms and everything else dealing with payroll? Check out our blog today to find easy-to-understand information and creative solutions to all of your payroll questions and issues. 

Payroll Taxes