Every individual, whether a permanent employee, independent contractor, freelancer, or even a business person, must file a tax return every year. However, employee income reporting differs from a business person, self-employed individual, or independent contractor.
The difference in income reporting, tax withholdings, and tax treatment require different filing methods for individuals falling into distinct categories.
Therefore, the IRS has made the requirement to use W2 for employed workers to report their income and compensation. Investors, business people, and self-employed people have to file Form 1099 to report their incomes and compensation.
Although the purpose of both forms is similar to each other, there are several differences. Therefore, in today’s article, we will discuss the differences between Form W-2 and Form 1099. We will also discuss the difference between W2 workers and 1099 workers.
So let’s get into it.
- Form W2 is called wages and tax statement; all employers must file the W2 before 31st January of every year. The employers will fill the Form W2 for all employees who receive annual remuneration and non-cash benefits of $600 or more.
- Form 1099 is filed by the payers for the recipients of non-employment compensations, interest payments, dividend payments, rent, gains, etc. Form 1099 is usually used for independent contractors, freelancers, or self-employed individuals.
- There are several variations of Form 1099; each variation will be filed depending on the nature of the payment.
- The main difference between Form 1099 and Form W2 is regarding the withholding taxes. The employers deduct the withholding taxes from the paycheck of the employees. However, the payers are not required to deduct the withholding tax from the payment when filing Form 1099.
What Is Form W-2?
Form W-2 is also called Wages and Tax Statement, and employers are required to file Form W2 with the Social Security Administration(SSA) every year before 31st January. Form W2 is necessary for every employer who is paying $600 or more in non-financial payments along with the monthly remuneration to his employees.
The IRS defines Wages and Tax Statements as follows:
Every employer must file Form W-2 for his employee to whom he has paid remuneration for the year, including non-cash payments of $600 or more against the services taken from the employee. The employer must include all the amounts from which the income, social security, or medicare tax was held.
The employers have to make six copies of the Form W2 for sending to the SSA, employees, local and state tax departments, and IRS, and keep one copy for personal records.
What Is Form 1099?
Form 1099 is counted among the documents that IRS call information returns. When it comes to Form 1099, the purpose is more or less the same. An employee working with an employer, freelancing, independent work, investments, etc., might need to file Form 1099 along with W2 to report his income from all sources.
IRS defines Form 1099 as follows:
Form 1099 is an information return filed by tax filers who might receive payments or compensation that falls under non-employment compensation, miscellaneous income, dividends, real estate transactions, education program benefits, government payments, etc.
There is a long list of who can file Form 1099 with the IRS for accurate reporting of income from all sources. There are so many variations of Form 1099, which we will discuss in the next section.
Types Of Form 1099
As mentioned earlier, there are so many variations of Form 1099, but the most popular forms are Form 1099-NEC, Form 1099-MISC, Form 1099-G, and Form 1099-Div.
We will briefly talk about the popular variations of Form 1099 and also name the other variations of the form you might need to file for the next tax years.
Form 1099-NEC is for tax filers who have to report their nonemployee compensation of above $600. The due date for Form 1099-NEC is 1st February, and the employers of the independent contractors, freelancers, etc., have to send the form to the IRS and the tax filers.
Form 1099-MISC is the form to report miscellaneous information regarding payments you have received which do not fall under NEC or other categories.
It can include the rent payments received, prizes and awards, royalties, medical and health care payments, crop insurance proceeds, etc.
Form 10999-G has to be filed for the government payments made to the tax filers and it can include tax refunds from local or state departments, unemployment compensation, etc.
The due date for Form 1099-G is 31st January to send the form to the recipients and 28th February for filing the form to the IRS.
Other Variations Of Form 1099
Here are the other variations of Form 1099 you might need to file for different causes:
- 1099-A(Acquisition or Abandonment of Secured Property)
- 1099-B(Proceeds from Broker and Barter Exchange Transactions)
- 1099-C(Cancellation of Debt)
- 1099-DIV(Dividends and Distributions)
- 1099-INT(Interest Income)
- 1099-K(Payment Card and Third-Party Network Transactions)
- 1099-LTC(Long-Term Care and Accelerated Death Benefits)
- 1099-OID(Original Issue Discount)
- 1099-Q(Payments from Qualified Education Programs)
- 1099-QA(Distribution from ABLE Accounts)
- 1099-R(Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc)
- 1099-S(Proceeds from Real Estate Transactions)
- 1099-SA(Distributions from an HSA, Archer MSA, or Medicare Advantage MSA)
- SSA-1099(Social Security Benefit Statement)
What are the differences Between Form W-2 and Form 1099?
If we understand the purpose of both forms, there are many similarities and what to report on the form. However, there are certain differences between Form W-2 and Form 1099. Here are the main differences you should know between the forms:
|Form W-2||Form 1099|
|What Does It Report?|
|The Form W2 reports an employee’s wages, salary, bonuses, etc., from his job. Besides, the details of medical taxes, withholding taxes, etc., are also reported on the Form W2 of every employee.||The Form 1099 reports the tax filer’s income from non-employment sources like rent, royalties, dividends, capital gains, gambling winnings, interest payments, etc. Besides, Form 1099 is also used by self-employed individuals, independent contractors, and freelancers for reporting non-employment compensation from the employer.|
|Filer Of Form|
|The IRS and Social Security Administration requires all employers to complete and file/mail the Form W2 of all employees working for the employer during a tax year.||As Form 1099 is not from the employer, many people believe that the tax filer has to file the form. However, the payer is responsible for completing, filing, and sending the correct variant of Form 1099, depending on the nature of the payment.|
|Purpose Of Form|
|The Form W2 is also called Wages and Tax Statement. It implies that the purpose of Form W2 is the accurate reporting of the adjusted gross income of the employees, withholding taxes, and other contributions.||The Form 1099 of the IRS is filed to document different types of payment an individual might have received during a tax year that do not fall under employment compensations. However, these payments must be income for the tax filer to fall under the scope of Form 1099.|
|Variations Of Form|
|Form W2 has no variations, and every employer who is taking services of his employees has to file the same form for his employees.||There are several variations of Form 1099, and each variation covers different types of payments. According to the IRS, there are over 15 variations of Form 1099.|
|The Form W2 is for the payroll workers whose contribution to medicare and social security taxes is 50%. The rest of the 50% comes from their employers. Therefore, Form W2 reports the contribution of both employers and employees.||Independent contractors, freelancers, and self-employed individuals have to pay 100% of their medicare expenses, social security taxes, etc.|
|There is also a difference in tax withholdings of Form 1099 and Form W2. In the case of Form W2, the employer withheld the taxes from the employee’s monthly wages or compensation and directly paid it to the IRS.||The Form 1099 doesn’t record the withholding taxes from the recipient of the money. The tax filer has to calculate the taxes, pay employment tax, and make quarterly tax payments to the IRS.|
1099 vs. W2: Which is better for employee 2023?
If we talk about which form is better for employees, there is no comparison between Form W2 and 1099. The filing of Form W2 by all employers is mandatory against the payroll workers. Form 1099 is for non-payroll workers or for self-employed individuals who receive non-employment compensations.
When would I provide Form W2 and Form 1099?
The employers file Form W2 for their employees to whom they pay annual remuneration and non-financial benefits of above $600. Form 1099 is used to report the payments made to independent contractors, sole proprietors, freelancers, self-employed people, or others against non-employment compensation.
What is the deadline for Form W2?
All employers must complete and electronically file or mail the Form W2 to the IRS and SSA before 31st January of every year.