W-2 vs 1099

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Businesses hire two primary types of workers. Employees are paid an hourly wage or regular salary, while independent contractors are paid according to the results they deliver or the services they provide. When it comes to managing tax withholding and reporting, it’s important to know the difference between a 1099 vs W-2 and how you need to file these documents.

This guide covers the difference between W-2 and 1099 tax forms and what types of workers would receive a 1099 or W-2.

The W-2 reports several things to the employee, federal government and the state revenue service:

• Total income subject to taxation: This is an employee’s wages for the year after pretax deductions. It’s what the IRS uses to determine the employee’s tax bracket and total taxes owed on their income.

• FICA and Medicare withholding: Social Security and Medicare aren’t technically taxes since they are payments into services employees receive later in life. They’re withheld separately from federal and state taxes based on each employee’s taxable income.

• Federal tax withholding: This is the amount of money a business withholds from an employee’s pay for the purpose of paying their federal taxes.

• State tax withholding: If an employer has employees who reside in a state that charges an income tax, state taxes are withheld in a similar fashion to federal tax withholding.

• Local tax withholding: In rare cases, employees may reside in a city that enforces a local income tax. If this is the case, taxes might be withheld from an employee’s check for local taxes.

Employers send employees as many copies of their W-2 forms as they need to file taxes with the federal government and their state and local governments. They also receive an additional copy for their own records. Copy A of the W-2 must be filed with the IRS with a W-3 to remain compliant with federal income tax law.

Required information to provide W-2s to employees

Most of the information needed to provide a W-2 has already been recorded when an employee filled out their W-4. Since circumstances can change, it’s important to verify that the following information is still accurate:

• Employee name: If an employee has recently married or filed for a change of legal name, this needs to be updated.

• Employee address: In cases where an employee has had a change of residence, you need to confirm where to send the W-2.

• Social Security number: It’s important to confirm that the Social Security number you have on record is correct.

The primary difference between a W-2 vs 1099 is that it includes withholding information. Since you’ve withheld taxes throughout the year and paid them to the IRS on behalf of your employees, they need to know the total amounts, so they can file their returns in a timely fashion.

1099s can be used to report the following:

• Money paid for contracted services

• Sales commissions

• Payments made to freelancers

• Attorney fees in excess of $600

• Rent or lease payments

• Payments made to accountants who are not considered employees

• Pension payments

• Other forms of compensation that can be considered income