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What’s the Difference Between a W2 and 1099?

What’s the Difference Between a W2 and 1099?

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If you’re a recruiter, employer, HR manager, or jobseeker, chances are you’ve wondered what the differences W2 vs 1099 is. Although both forms report employee taxes and wages, they have some key distinctions. By understanding the difference between W2 and 1099, you avoid worker misclassification to prevent lawsuits and IRS penalties. Moreover, W2s and 1099s determine the level of control over your staff’s wages and schedules.   

What is a W2?

A W2 refers to a tax form that reports an employee’s annual payments. As such, W2 workers are part-time or full-time employees who receive regular salaries and benefits such as health insurance. W2 forms contain taxation details such as:

  • State Income: It’s the amount going into state income taxes
  • Medicare and Social Security Income: It’s the amount going into Federal Insurance Contributions Act (FICA) taxes
  • Taxable Income: These are an employee’s total earnings and the amount retained for federal taxes

A W2 form shows how much an employee owes or whether they’re getting a refund from the IRS. Ordinarily, employers issue W2s to workers earning at least $600, regardless of their job. Employers should also file W2s with the Social Security Administration, IRS, and relevant state and local tax agencies. Remember, the IRS requires employees to file W2s even if they only worked for part of the calendar year.  

What is a 1099?

1099 forms report payments sent to independent contractors. This means you don’t need to withhold payroll taxes because the workers handle their employment taxes. 1099 workers are self-employed individuals who receive compensation depending on completed assignments. They include.

  • Freelancers: They engage companies on a per-task basis. Freelancers decide their rates and how many assignments they can take at a go. It’s not uncommon for freelancers to work with several companies at the same time.  
  • Consultants: Thanks to their training and experience, companies hire these professionals for specialized advice. As expected, organizations pay top dollar for a consultant’s time.
  • Independent Contractors: They choose their rates and assignments making them similar to freelancers. Even so, independent contractors take up longer projects. Depending on your agreement, you can pay by the hour or include a retainer.  
  • Contractors: Although they’re self-employed, contractors mostly find work through agencies.
  • Gig Workers: They perform temporary tasks, usually through online platforms. However, they’re paid per task instead of per hour.

Note that employers used 1099-MISC forms to report non-payroll income before 2020. Even so, the IRS has since reintroduced 1099-NEC forms to simplify filing deadlines. The 1099-NEC features one filing deadline for every payment, unlike the 1099-MISC which had multiple due dates. You should submit the 1099-NEC if you paid more than $600 to a contractor in the tax year. Although 1099 MISC forms still exist, they only record miscellaneous income like rent and payments to attorneys.

The Key Differences Between W2 vs 1099

W2 and 1099 workers differ in the following ways.

  1. Withholding Taxes

A business remits payroll taxes for every W2 employee. That includes Medicare, federal tax withholdings, and Social Security. However, companies don’t submit these taxes for 1099 workers since individuals are responsible for their own payments.

  1. Social Benefits

From health insurance and financial planning to wellness programs and college debt relief, W2 workers receive numerous benefits from their employers. However, independent contractors aren’t entitled to any benefits.

  1. Legal Protections

Federal, state, and local authorities have laws for employee protection. For example, the government provides laws on minimum wage, leave, and overtime. However, such is not the case for 1099 workers who must negotiate for their contract interests. 

  1. Control

Employers have a greater say in their employees’ work because they control schedules, company processes, and policies. On the other hand, independent contractors choose how, where, and when they work. A 1099 worker will provide a contract outlining their rates, scope of work, and payment terms.

Remember, a worker can be a W2 and 1099 at the same time. This means the individual works as an employee and contractor in one organization. The worker can play both roles simultaneously or at separate durations. An example is when an organization’s secretary owns a janitorial company that offers cleaning services after work hours. 

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