1099 vs. W-2 Tax Form Guide: What Employers Need To Know

Protect your business by filing Forms W-2 and 1099 correctly. Use these forms to report payments to contractors and payroll tax withholdings from employees.

By filing information returns, businesses must tell the Internal Revenue Service (IRS) about payments made for work performed. The type of information return used for this purpose depends on the nature of the service provider — as an employee or independent contractor. The party required to file the information return is the business for which the work is performed. These forms enable the IRS to be sure that service providers are correctly reporting employee income and that the company is paying employment taxes for service providers who are employees.

What’s the Difference Between 1099 and W-2 Forms?

The main difference between the Form 1099 and W-2 is primarily what’s entered on it:

• The 1099-NEC is solely for payments to independent contractors. No tax payments are reported on this form. 
• The W-2 is a more comprehensive information return, listing not only taxable compensation to employees but also federal (and, where required, state) income tax and Federal Insurance Contributions Act (FICA) withholding, salary reduction amounts for contributions to 401(k) plans and specific other employee benefit plans, and other withholding (e.g., for state disability benefits in certain states, or paid family and medical leave benefits in certain states) including various employee benefits (e.g., health coverage, group term life insurance, and dependent care assistance).

Wages and other payments to employees are reported on Form W-2, while payments to independent contractors are reported on Form 1099-NEC. To file the appropriate form, each business must classify its workers as employees or independent contractors.

From an employer’s perspective, using independent contractors can be less costly than employees. The savings come from not having to pay employment taxes for independent contractors and provide them with benefits; there are also savings in administrative costs. However, worker classification is not simply a matter of choice. For federal tax purposes, a worker is an employee and can’t be treated as an independent contractor if the company exercises sufficient control over when, where, and how the work is done. More specifically, the IRS has specific behavioral, financial, and relational tests that decide when a worker is an employee for taxation purposes.

In contrast, independent contractors are essentially workers in business for themselves. They generally control when and how their work is accomplished, use their own tools and equipment, and risk profit or loss on each assignment.

What Is a 1099-NEC Tax Form?

A 1099-NEC form is an annual information return listing the gross amount of payments made to an independent contractor during the calendar year. If payments to an independent contractor during the calendar year total $600 or more, the business for whom services were performed must file it. However, it can be filed even if payments are less.

There are 2 types of 1099 forms that affect employers the most: a 1099-MISC and a 1099-NEC. If you’re wondering when to use a 1099-NEC vs. MISC, here’s where the two forms differ:

• As of the 2020 tax year, IRS Form 1099-NEC is the independent contractor tax form businesses use to report payments to contract workers in the previous tax year. It’s filed with the IRS and provided to the contractor for reporting income.
• Form 1099-MISC was previously used for independent contractor payments, but it’s now used to pay royalties, rent, or payments classified as other income.

What Is a 1099 Worker?

A 1099 worker is often called an independent contractor, a type of worker who contracts their services to a business. As we’ll discuss later, businesses must carefully classify their workers correctly. So, while it’s best practice to consult an HR advisor or legal counsel to ensure proper classification, here are some examples of types of workers who would receive a 1099 form.

Examples of 1099 Workers

• A consultant brought in for a set amount of time to complete a project
• A freelance web developer who works on a per-assignment basis and uses their own computer
• An electrician contracted three times throughout the year to repair power outages in an office building

How To Fill Out a 1099-NEC Form

Completing a 1099-NEC form for contractors is relatively simple.

• Fill out Form 1099 with the name, address, and total amount paid to your contractor. You will need the following information about your contractor from the contractor’s Form W-9:
  • Legal name
  • Business name
  • Personal address
  • Social Security Number or Taxpayer Identification Number
  • Payment details from the past tax year
• File Copy A with the Internal Revenue Service (IRS) by the deadline
• Send Copy B to your contractor
• Keep Copy C for your business’s records

When To Issue a 1099-NEC Tax Form

You would typically issue a 1099 form to individuals or other businesses that provided some service but aren’t employees of your business. Independent contractors may be used when there is a project or assignment with set start and end times, there’s no guarantee that you’ll have continuous and ongoing work for them to do, there are no set hours, or the work can be done without supervision or oversight.

When Should 1099s Be Sent Out?

Per IRS guidelines, employers must issue 1099-NEC to independent contractors who earned more than $600 in non-employment compensation in a year by January 31 of the following year. Form 1099-NEC is sent to the worker or business that performed services and to the IRS.

What Other Forms Do You Need When Working with Independent Contractors?

Form 1099 isn’t the only form you need on hand to properly pay and tax your contractors.

IRS Tax Form W-9

A company uses a W-9 form to request a contractor’s taxpayer identification number (TIN). This ensures that payments are made to the appropriate individual or the contractor’s business and that the IRS receives the correct information when it’s time for filing. The TIN reported on the form can be the contractor’s Social Security number or an employer identification number. This tax form for independent contractors should be kept on file for four years in case questions arise from either the contractor or the IRS.

• Who completes the Form W-9? The independent contractor should complete the W-9 and return it to the business with other requested information.
• When should the Form W-9 be completed? Contractors should complete it at the start of their working relationship with a company.
• What is the submission deadline for Form W-9? There is no IRS filing deadline for W-9s. Rather, the business paying the independent contractor must maintain the form and use the data supplied to ensure that proper compensation is issued.

IRS Tax Form 1096

Form 1096 is a summary report of the informational returns filed by a business. This form is filed only with the IRS and not given to independent contractors.

• Who completes Form 1096? The company preparing Form 1099 would also prepare Form 1096. This form should be completed and submitted with the company’s informational returns when filed in paper form. Electronic filing instructions are found in IRS Publication 1220.
• When should Form 1096 be completed? It should be completed at the end of the business year, when 1099-NEC forms for non-employee compensation are due (January 31, 2021, for the 2023 tax year).
• What is the filing deadline for Form 1096? The Form 1096 deadline is January 31 when summarizing 1099-NEC forms reporting non-employee compensation. Due dates may vary for other types of informational filings, so it’s essential to check each year when creating your tax reporting calendar.

What Is a W-2 Tax Form?

Form W-2 is an annual information return provided to an employee listing taxable wages and income tax withholding and withholding of Social Security and Medicare taxes. The form also lists various employee benefits (some taxable, some tax-free) and state income tax withholding. It must be filed by the employer for each employee, regardless of the amount of compensation paid during the year.

What Is a W-2 Employee?

In terms of taxes, a W-2 employee is an individual who is paid through their employer’s payroll and has their payroll taxes withheld throughout the year. By January 31, the W-2 employee receives a Form W-2 that includes information about taxable compensation, tax withholdings, and any additional tax deductions for employee benefits such as employer-sponsored health coverage or 401(k) plans from the prior year. The W-2 employee then uses this information to complete their yearly taxes. Here are some examples of employees who would receive a Form W-2.

Examples of W-2 Employees

• An office worker with scheduled hours, ongoing work, a company-issued laptop, and a direct supervisor
• A warehouse supervisor who has scheduled hours each week and receives periodic training
• An administrative assistant who must be in the office from 9 AM to 5 PM, has set responsibilities, and receives health insurance through an employer-sponsored medical plan

How To Fill Out a Form W-2

If you're wondering how to fill out a W-2 manually and what each box on the form refers to, look no further.

• Box A: Employee Social Security Number (SSN)
• Box B: Employer Identification Number (EIN)
• Box C: Employer name, address, and ZIP code
• Box D: Control number. Leave this box blank if your business doesn't use control numbers.
• Boxes E-F: Employee name, address, and ZIP code
• Box 1: Wages, Tips, Other Compensation. This refers to the total amount you paid to the employee during the year. It is subject to federal income tax. It does not include pre-tax retirement contributions, health insurance premiums, and other pre-tax employee benefits.
• Box 2: Federal income tax withheld. This box instructs how much federal income tax has been withheld from the employee's wages based on their total taxable income and filing status.
• Box 3: Social Security wages. This Box shows the employee's wages subject to Social Security tax. This number should not exceed $176,100 for 2025, which is the Social Security wage base.
• Box 4: Social Security tax withheld. This refers to the amount withheld from the employee's Social Security wages. For 2025, this number should not exceed $10,918.20 ($176,100 x 6.2%).
• Box 5: Medicare wages and tips. Generally, this is the same amount as what's reported in Box 4.
• Box 6: Medicare tax withheld. The employee's share of Medicare tax amounts to 1.45% of their wages. The amount in Box 5 multiplied by 1.45% should equal the amount in Box 6.
• Box 7: Social Security tips. Refers to the amount of tips the employee earned and reported, if applicable. For 2025, this number should not exceed $176,100.
• Box 8: Allocated tips. Report the dollar amount of tips you allocated to this employee, if applicable.  
• Box 9: Leave this box blank.
• Box 10: Dependent care benefits. Include the total amount of dependent care benefits you provided this employee under a dependent care assistance program, if applicable.
• Box 11: Nonqualified plans. This box reports the employer's distributions from a nonqualified deferred compensation plan to the employee. This amount should also be included in Box 1.
• Box 12: Codes. Several codes exist that you may need to add here. These codes may lower the amount of the employee's taxable wages.
• Box 13: Checkboxes. Simply mark the boxes that apply to the employee: Statutory employee; Retirement plan; Third-party sick pay.
• Box 14: Other. Include amounts and corresponding details around other payments and deductions.
• Box 15: State | Employer’s state ID number: Mark your state of operation and your state EIN.
• Box 16: State wages, tips, etc. Refers to the employee's wages subject to state income tax. This may or may not be the same value as that in Box 1. If the employee works in a state with no state income tax, leave this section blank.
• Box 17: State income tax withheld. This box instructs how much state income tax has been withheld from the employee's wages based on their total taxable income and filing status.
• Box 18: Local wages, tips, etc. These are the total taxable wages subject to local income tax. If the employee works in a locality with no local income tax, leave this section blank.
• Box 19: Local income tax. This box instructs how much local income tax has been withheld from the employee's wages based on their total taxable income and filing status.
• Box 20: Locality name. The name of the relevant city or locality.

When To Issue a W-2 Form

You must issue a Form W-2 to every employee who you paid during the year and withheld certain taxes from their paychecks.

Per IRS guidelines, employers must issue a Form W-2 to every employee who worked for them in a year by January 31 of the following year. This is also when copies of W-2s must be sent to the Social Security Administration (SSA).

Can an Individual Get Both a W-2 and a 1099?

Sometimes, the same person can receive a 1099 and a W-2. For example, suppose an individual who is an officer and employee of a corporation also serves on the board of directors. In that case, this person may receive a W-2 for employee compensation and a 1099 for fees received as a corporate director (a non-employee position).

How To File W-2 Forms

Companies’ responsibilities for filing W-2s are twofold: providing originals to the workers and transmitting copies to the government. Be sure to follow the rules for furnishing workers with their forms. For example, an employer can send an employee their W-2 electronically instead of mailing or handing it to the employee, provided there is prior consent to this (consent should be electronic to ensure that the employee can access the W-2 when sent).

If the company has 250 or more W-2s, they must be transmitted to the SSA electronically. However, a smaller employer may choose to do so to save time and ensure accuracy. The copies must be accompanied by Form W-3. If electronic filing is not used, copies with a transmittal form must be mailed to the SSA.

How To File 1099 Forms

For 1099s, forms can be sent electronically to independent contractors if they consent to receive them. If the company has 10 or more 1099s, they must be transmitted to the IRS electronically.

Electronic filing is done through the Filing Information Returns Electronically (FIRE) system (employers must register to do this if they plan to file themselves).

Why Is It Important for Employers To Correctly Classify Workers to the IRS?

It’s essential that small businesses correctly classify their workers under the IRS test and other tests used to evaluate whether an individual is correctly classified as an independent contractor under federal, state, and local employment laws and regulations. Misclassifying an employee as an independent contractor can result in paying back wages, employment taxes, and possibly unpaid employee benefits (e.g., health coverage and retirement plan contributions).

IRS penalties for unpaid employment taxes due to worker misclassification can mount up. Typically, the IRS will go back for three years of unpaid taxes.

• Penalty for not filing a required Form W-2 in 2024: $60 per form if filed within 30 days after the due date; $130 per form after more than 30 days but not after August 1; $330 per form if filed after August 1. These penalty amounts can be adjusted annually for inflation.
• Penalty for failure to withhold wages: 1.5 percent of wages, plus interest.
• Employee’s share of FICA: 40 percent.
• Employer’s share of FICA: 100 percent.
• Failure to pay tax: 0.5 percent of the unpaid tax liability for each month (up to 25 percent of total tax liability).

Suppose the IRS thinks the misclassification was fraudulent or your business intended to avoid paying employment taxes. In that case, penalties can include 20 percent of wages paid plus all of FICA (100 percent of the employee and employer share). Owners can be held personally liable for income taxes and the employee share of FICA that should have been withheld.

And the IRS may even seek criminal penalties of up to $1,000 per misclassified worker. Moreover, the U.S. Department of Labor can impose its own penalties for worker misclassification.

Section 530 relief may help you avoid employment tax penalties. This allows businesses to avoid employment tax penalties resulting from worker misclassification as long as they’ve reported payments to contractors on 1099s, consistently reported workers, and have a reasonable basis for treating them as independent contractors. There’s also a way to minimize penalties by voluntarily reclassifying contractors as employees under the IRS’ Voluntary Classification Settlement Program (VCSP).

Tests for 1099 vs. W-2 Employee Classification

You may wonder whether some of your workers technically qualify as employees or independent contractors or freelancers when it comes to the law.

IRS Common Law Rules

The IRS uses rules to help determine whether a worker meets proper federal tax standards for employees or independent contractors.

• Behavioral control: Does your company direct and control the work of the worker? Does the worker receive specific training and instruction?
• Financial control: Does the employer provide the worker with methods of payment, expense reimbursements, and tools and supplies?
• Type of relationship: Does the worker receive a written contract or other benefits and perks that signal that they are key to the business?

Answer these three questions honestly and look at the answers holistically; no one rule outweighs another. If you're still in doubt, it's safe to classify the worker as an employee.

DOL Economic Reality Test

Another way to help with worker classification is provided by the Department of Labor.

In summary, and in the DOL's own words, the factors that should help guide classification are:

1. Opportunity for profit or loss depending on managerial skill
2. Investments by the worker and the employer
3. Permanence of the work relationship
4. Nature and degree of control
5. Whether the work performed is integral to the employer’s business
6. Skill and initiative

Keep in mind that the DOL's Final Rules on independent contractors are moving targets and have undergone recent legal revision.

EEOC Employee Classification

The U.S. Equal Employment Opportunity Commission has its own guidelines to determine whether a worker is an employee. In addition to many factors similar to those outlined above, some other considerations include:

• Can the worker hire and pay assistants?
• Is the worker engaged in their own separate occupation or business?
• Can the employer discharge the worker?
• Do the worker and employer believe that they have engaged in an employer-employee relationship?

State-Specific ABC Test

Several states use the "ABC test" to figure out whether a worker is covered under unemployment insurance, wage and hour laws, and other state-specific benefits. A worker is an employee unless all 3 of these conditions are satisfied:

• Absence of control: The organization does not explicitly direct the work being done by the individual.
• Business is unusual: The worker performs off-site or other work outside the organization's status quo.
• Customarily engaged: The worker performs independently in a capacity that is similar to the work performed for the company, perhaps for other businesses or otherwise within that established trade.

What Are the Important Deadlines for Filing W-2s and 1099s?

Both Forms W-2 and 1099 must be furnished to the service provider by January 31 of the year following the year of payment (e.g., January 31, 2025, for wages/compensation paid in 2024).

The same filing deadline applies to submissions of the forms to the government, whether done electronically or on paper. January 31 is the deadline for submitting copies of the forms, along with a transmittal form to:

• The IRS for 1099s reporting non-employee compensation (along with Form 1096)
• The Social Security Administration for W-2s (along with Form W-3)

The deadline is strictly enforced. If a business can’t meet the deadline, it can request a 30-day extension through Form 8809, but it’s not granted automatically. There are five acceptable reasons for which the IRS will grant a non-automatic filing extension:

1. The business experienced a catastrophic event in a federally declared disaster area
2. The business suffered a fire, casualty, or natural disaster affecting the operation of the business
3. There was a death, serious illness, or unavoidable absence of the person responsible for filing the returns
4. The information return is being filed for the first year the business is established
5. The filer didn’t receive timely data on a third-party statement needed to complete the form

And there’s no possibility of any additional extension of time to file. Penalties will begin to accrue after the extension period ends.

Correctly Taxing W-2 Employees and 1099 Workers Protects Your Business

Correctly classifying your workers and submitting the correct information to report payments made to them can help protect your business from trouble with the IRS. A reputable payroll services provider can help your business handle payments to workers in compliance with IRS rules.