Form 1099 vs. W-2: Tax Filing for Employees and Independent Contractors

A guide to help you decide between filing Form 1099-NEC and Form W-2!

As a business owner, you may operate and hire workers as needed to complete the work that must be performed. Sometimes you hire an employee for the long term and in some cases, you may hire an independent 1099 contractor for a single project. 

This can become difficult when it comes time to file and distribute tax forms to these individuals. Especially in today’s workforce, the line between employees and independent contractors can become a gray area.

You may end up questioning whether this individual requires a Form W2 or a 1099-NEC

Here is an overview of the difference between the two and tips for determining which you should file this January. 

How does the IRS Define an Employee?
An employee in its most basic definition is a worker who performs specific ongoing work. If you can control the work that is being performed and how or where it is being performed, this is likely an employee rather than a paid contractor. 

There are also a few major indicators that your worker is an employee. This individual was brought on to fulfill a role, rather than to provide a specific service or project. 

Plus, an employee typically receives a salary, but they also receive other benefits like paid time off, health insurance, and/or a retirement plan. The employee was able to negotiate these benefits and signed an employment letter agreeing to and accepting the terms of employment. 

How does the IRS Define an Independent Contractor?

The most basic definition of an independent contractor is an individual that performs services for a business that does not stipulate when or how they are completed for compensation. 

While an independent contractor may complete work for you, they are not doing it on your terms, they are self-employed. 

The major indicator here is that self-employed individuals are responsible for withholding taxes from their own income. Whereas employees are not required to do this, their employer is responsible for withholding and reporting these amounts. 

What Form Should I File, W-2 or 1099-NEC?

Employees will need a W-2 Form to complete their own personal tax return and an independent contractor will need a Form 1099-NEC

Employers are required to file a Form W-2 with the SSA for each of their employees on an annual basis. This form is a wage statement that details the withholding from the employee’s wages and the total amount of compensation they received throughout the tax year. 

Form 1099-NEC is used to report payments made to independent contractors, vendors, freelancers, and all other non-employees. ‘NEC’ stands for non-employee compensation. Form 1099-NEC is part of the 1099 Form Series, these forms are all used to report certain types of payments to the IRS. 

What is the Deadline to File Form W-2 and Form 1099-NEC?

Both of these forms have the same deadlines. Forms W-2 and 1099-NEC must be filed with the IRS (1099-NEC) and SSA (W-2) by January 31, 2023. 

You must also distribute copies of these forms to recipients. These form copies must be postmarked by January 31, 2023. 

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