Difference between a 1099 and W-2 Form: Have hired an individual to perform work? Does the individual work as a part of your business? As per the IRS rules, if you hire an individual who is not a part of your business but performs work are “Independent contractors”.
Getting confused? Which Form 1099 or W-2 to issue? Don’t worry! We provide you with clear information about the 1099 and W-2 Forms. Furthermore, We’ll let you know the importance of identifying a 1099 worker and a W-2 employee. We provide step-by-step guidance in determining an individual as a contractor and an employee.
Importance of knowing 1099 workers and W-2 employees?
Given below are a few reasons about the importance of knowing 1099 contractors and W-2 employees:
- The IRS may impose penalties or file an employee misclassification lawsuit against your business for misclassifying a contractor or an employee. So, as a taxpayer, you’re responsible to know 1099 workers and a W-2 employee.
- As per the IRS rules, you’re required to withhold taxes from W-2 employees. For a contractor, you’re not required to withhold and pay taxes. With the help of employee classification, it is easy to identify how both you and your worker are taxed.
- Finally, employee classification helps in determining how much control you have over a worker’s payment, or other aspects of their job.
How to determine an individual receives a Form 1099 or w-2?
As we know earlier, there are no laws to determine whether an individual is a contractor or an employee. But according to the IRS guidelines, the below three categories determine the degree of control you have on a worker:
Behavior control
If the employer or the business controls the worker, then the worker is treated as an “employee”. An Independent contractor is a person who works on a course of business but is not treated as an employee.
Financial control
When the business awards or promotes the individual by considering the performance of work, then the individual is considered as an employee. If the payer doesn’t control the business aspects over an individual, then the individual is a 1099 worker.
Type of relationship
If an individual has employee policies or offers employee-type benefits, then the individual is a W-2 employee. When the worker’s relationship is on a contract basis, then the worker is a 1099 contractor.
Who are a 1099 worker and W-2 employee?
| 1099 Worker | W-2 Employee |
| 1. A 1099 Worker is a self-employed individual or an independent contractor. | 1. A W-2 worker is an employee of a business or an organization. |
| 2. Freelancers, gig workers, etc are considered 1099 workers. | 2. An employee can be full-time or part-time. |
| 3. In general, businesses hire 1099 workers to complete a specific task. | 3. Employees work according to the business Schedules and policies. |
| 4. 1099 workers can make their own decisions to complete the work. | 4. W-2 employee cannot make their own decisions to complete the work. Instead, they need to follow the instructions given by the business owners. |
| 5. Self-employed individuals pay their taxes. | 5. Employer withholds taxes from the wages of an employee and pays the taxes on their behalf. |
| 6. Taxes are not withheld for independent contractors. | 6. Social security and Medicare taxes are withheld from an employee. |
| 7. 1099 contractors don’t receive any benefits like an employee. | 7. Employees receive benefits like health insurance or retirement savings, paid leaves. |
| 8. When a business works for temporary or short-term projects, they hire a 1099 worker. | 8. When your business needs temporary help, then a W-2 employee is the best choice. |
| 9. At the year-end, a 1099 worker receives the respective 1099 Form for the work performed. | 9. At the end of the year, employees receive a W-2 Form. |
When does a worker serve as both a 1099 contractor and a W-2 employee?
According to the IRS, an individual can serve as both an independent contractor and an employee. Either concurrently or at separate times in the same calendar year, a worker can be a 1099 contractor and a W-2 employee. For instance, Joseph works as a guardian for a county public school. He receives a W-2 Form from the county for performing services like an employee. Additionally, Joseph operates business in providing slow plowing services. So, County issues 1099 Form as he performs services related to snow plowing. In this way, Joseph receives both 1099 Forms and W-2 Forms at the year-end.
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