Form W-2 vs. Form 1099: Key Differences and When to File Them

Determining which of these forms to file can make or break your tax season! Here's why...

When it comes to running a business, numerous components require attention, including payroll, inventory, accounting, and IRS tax compliance. Juggling these aspects simultaneously can be challenging, especially when year-end filing with the IRS and SSA approaches.

A crucial starting point is managing your employees and independent contractors. Whether they are permanent employees on your payroll or freelance workers with flexible schedules, reporting the amounts you’ve paid them through tax forms is essential.

In this blog, we’ll tackle what those tax forms are, when each should be filed, and other key information to help you have a successful tax season!

Key Differences Between W-2 and 1099 Forms

A Single Information Return vs. A Series of Information Returns

The most basic difference between these forms is that Form W-2 is a single return, while the 1099 is an entire series of returns. Another basic distinction between them is that 1099 Series returns are filed with the IRS, while W-2 is filed with the Social Security Administration (SSA). 

Reporting Wages vs. Nonemployee Payments

While the Form W-2 is a wage statement that is used to report all wages and compensation paid to employees, the 1099 series is an entire group of forms that is used to report payments made to non-employees. In the case of an independent contractor or vendor, the payments would be considered nonemployee compensation and would be reported using Form 1099-NEC.

Employer Tax Withholding vs. Self-employed Tax Withholding

Another major distinction between the reporting on these forms is the tax amounts withheld from the compensation amount. An employee is a regular fixture on their employer’s payroll, and therefore the employer is withholding taxes as required. 

However, when a business hires an independent contractor or vendor to complete a project, they are only responsible for reporting the amount of nonemployee compensation payments rendered. The independent contractor or vendor is responsible for withholding their tax amounts, and reporting this as required based on the payments they’ve received. 

Employees vs. Independent Contractors: Behaviors and Tax Treatment

Now that we’ve covered the basic differences between the forms themselves, let’s explore how to determine which individuals working for your business require each specific form. There are major distinctions between employees and contractors; however, the line can seem blurred at times. Understanding their behaviors and tax treatments will provide you with the insight needed to classify them. 

Behaviors

  • An employee is a permanent fixture on your business’s payroll. You determine their working hours, responsibilities, and salary or hourly rate. This is a fixed relationship for its duration. Whether they are part-time or full-time, they carry out their work based on your requirements, and you provide them with the tools and resources required to complete the job. 
  • An independent contractor has a much more flexible arrangement with your business, while you compensate them for their services, you likely do this on a per-project basis. This is not a fixed relationship, and the independent contractor determines their schedule and responsibilities within the parameters of the project. They likely supply their tools and resources to complete the work without your business’s interference. 

Tax Treatment

  • When hiring and onboarding an employee, you will require different tax information from them than you would a new independent contractor. Meaning that you are treating them differently when it comes to taxes. A new employee is required to complete and submit a Form W-4. In this form, they provide their SSN, filing status, and any other relevant information about claims and adjustments. This information will be used to determine the amount of taxes you withhold from their wages each pay period. 
  • When your business establishes a new relationship with an independent contractor or vendor, you are required to request a Form W-9 from them. This is used to collect their basic information and Taxpayer Identification Number (TIN). This can be their EIN or SSN depending on whether they are a business entity or an individual taxpayer. 

Additional Cases for Filing 1099 Series Forms

While the 1099-NEC for nonemployee compensation is one of the most common 1099 forms your business will encounter and be required to file. Another common 1099 form is the Form 1099-MISC for miscellaneous information. When making a payment in the course of doing  business, Form 1099-MISC should be filed to report:

  • Rents
  • Prizes and awards
  • Other income payments
  • Medical and health care payments
  • Payments to an attorney
  • Crop insurance proceeds
  • Cash paid from a notional principal contract to an individual, partnership, or estate
  • Any fishing boat proceeds
  • Section 409A deferrals
  • Nonqualified deferred compensation
  • If paid a minimum of $10 in royalties or broker payments instead of dividends or tax-exempt interest.
  • Payments made for direct sales of more than $5,000 of consumer products for resale anywhere other than a permanent retail establishment.
  • Even if the payment is less than $600, if you withheld any federal income tax under backup withholding rules, you must report this amount using Form 1099-MISC.

The deadline for e-filing Form 1099-MISC for the 2023 tax year is April 1, 2024, while the deadline for distributing copies to payment recipients is January 1, 2024. 

Deadlines for Filing Form 1099-NEC vs. W-2

One of the few things these forms have in common is their deadlines! The filing requirements are also similar, in addition to filing these forms with the IRS, SSA, and required states, you must also distribute copies to employees/recipients. They need a copy of this information to complete their personal tax returns. 

  • Form W-2
    • The deadline for filing Form W-2 with the SSA is January 31, 2024
    • The deadline for distributing employee copies is January 31, 2024.
  • Form 1099-NEC
    • The deadline for filing Form 1099-NEC with the IRS is January 31, 2024
    • The deadline for distributing recipient copies is January 31, 2024.

Are you ready to begin your 1099 and W-2 filing for the 2023 tax year? So is the team at TaxBandits! These forms are now available for you to begin filing as soon as your business has its year-end reporting information available. 

Plus, we offer time-saving features to help you get the job done easily and efficiently. Take advantage of built-in error checks using the IRS Business Rules, bulk upload options, and recipient copy distribution via postal mail or secure online access!

IRS Form 1099 vs W-2

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