1099 vs. W-2 Employee: What’s the Difference and What Does It Mean for Your Taxes?

March 15, 2024

6 min Read

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How you’re classified as an employee will affect you file your taxes. So, does that mean you’re a W-2 or a 1099 employee? If you’re an employee, you’ll receive a W-2. And if you’re an independent contractor, you’d receive a 1099 form. Likely, you might be one of the many tax filers have some questions about how these two important forms work.

What Is a 1099 Form?

A 1099 form is used to report a wide range of types of income. A 1099-NEC, which stands for nonemployee compensation, is the form used to report compensation to independent contractors, freelancers and any work not typically reported using a W-2. 1099 forms can cover everything from rental income to Social Security benefits. For contractors, however, the 1099-NEC is the appropriate form.

Businesses that pay $600 or more to a specific contractor must provide the contractor with a 1099-NEC. However, even if you make less than $600 from a specific source, you’ll still need to report that income. Business are required to submit their 1099-NEC forms by January 31 that contractors can receive them. If January 31 isn’t a business day, then the form would need to be submitted by the next available one.

The 1099-NEC will contain a variety of information, including the name and address of the payer and recipient, total nonemployee compensation and any federal or state tax withheld.

What Is a W-2 Form?

A W-2 form also provides income information and employees are to use this when filing taxes. This includes both full-time and part-time employees.

Along with wage and salary information, the W-2 also includes details about federal and state tax withholding and employee benefits such as health insurance. Employers must provide their employees with their W-2 forms by January 31, although it is possible to request an extension.

How Can I Tell If I’m an Employee or a Contractor?

Employees may have different working arrangements than contractors do. However, there are important distinctions that define the two.

For one, employers have much more control over employees than they do hired contractors. There are three areas to consider when making this determination:

Behavioral: Employers can control the specific tasks and roles that employees fulfill and how they handle those tasks, while an independent contractor has a bit more freedom.
Financial: A business provides tools and supplies, reimburses expenses, and is otherwise responsible for certain business aspects, while an independent contractor is typically responsible for their own.
Type of relationship: Written contracts and employee benefits such as health insurance, vacation pay, or a pension plan typically indicate an employee rather than an independent contractor.

There are no hard and fast rules to evaluate these criteria. It’s up to business owners to handle how they’re categorizing their workers.

What Counts as an Employee?

Employees have an employer who can control what they do in their job and how to do it. Employment is typically defined in a contract, but even if there isn’t a contract written out, it doesn’t necessarily mean the worker isn’t an employee.

If a person is unable to decide their schedule or accept and reject specific tasks in a meaningful way, then they are likely an employee. Being a part of company health insurance programs or retirement savings plans can also indicate an employee relationship.

What Counts as an Independent Contractor?

Independent contractors may have a wide range of different work agreements. They may or may not have an ongoing contract for work over any period of time.

Independent contractors make agreements based on the results of their work and have the freedom to decide how to go about their work. Independent contractors are also responsible for working out their tax obligations rather than having an employer implement payroll deductions.

Here’s another example: you have an independent trade–you own an Etsy store or have a couple of different side hustles— or operate your own business, and work as an independent contractor for other parties.

How Employee Status Affects Your Taxes

Whether a worker is considered an employee or an independent contractor ultimately impacts how your taxes are filed. Being classified incorrectly could leave you with higher-than-expected tax obligations.

One of the primary differences is that W-2 employees will have income tax withheld from each paycheck. In many cases, this means that employees can receive tax refunds when filing their taxes if deductions or other factors bring taxes payable below the total of those withheld funds.

Businesses do not have to withhold any income tax from payments to 1099 contractors, although they can if both parties agree. FICA payroll taxes that contribute to Social Security and Medicare include both an employer and employee portion. W-2 employees have that employer portion paid by the employer, but 1099 contractors have to pay for it on their own.

Do Employers Decide Whether to Send a 1099 or W-2 Form?

Employers do not simply decide whether they would like to treat the people who work for them as W-2 employees of 1099 contractors.

Any employer that classifies an employee as an independent contractor without actual basis to do so can be held liable for employment taxes for that employee. There are some relief provisions available if an employee has been misclassified, but the employer had a seemingly reasonable basis to do so.

Whenever a business or employee is unsure about proper classification, either party can prepare and submit Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. The IRS will then review the facts and provide an official status decision.

What if I Haven’t Received My Tax Forms?

Both W-2 and 1099 forms are due Jan. 31. If a form is late or some information is incorrect, the first step should be to contact the employer or payer. If a form still hasn’t arrived in time to file taxes, the IRS recommends estimating income from all sources, including capital gains, to ensure that the return is filed on time and amend the return later.

If an employer or payer refuses to make a correction to an incorrect W-2 or 1099, the IRS recommends reaching out to an IRS Taxpayer Assistance Center. The IRS will send a letter to the employer to correct the issue.

Final Take

Employees and independent contractors have different tax situations. When you’re planning to file your taxes, you may find it helpful to talk with a trusted tax professional to find the answers you need, especially if you have any questions about your filing status.

Teddy Garcia contributed to the reporting for this article.

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