Which Form to Report Income—W-2 or a 1099-MISC?
Are you paying an employee or an independent contractor?
Employers must submit annual wage reports to workers and file these reports with the Internal Revenue Service (IRS) or the Social Security Administration (SSA) as well. These statements detail income for employees and independent contractors for tax purposes so workers can accurately file their income tax returns.
But which wage reports do you give to which workers? First, you must determine whether someone who works for your company is an employee or a non-employee, then you'll know which report form to give that person.
Who Receives a W-2 and Who Receives a 1099-MISC
W-2 forms are given to employees.This form includes information for the tax year about:
- Taxable income for the employee and how much federal income tax has been withheld from the employee's paycheck.
- Social Security and Medicare income and FICA taxes (on this Social Security and Medicare income) and the amount of this income that has been withheld from the employee's paycheck.
- State income and state income taxes, and the amount withheld from the employee's paycheck
- Employee tip income
- Taxable and non-taxable employee benefits
Form 1099-MISC is given to individuals and businesses working for your company who are not employees, but only if you have paid them $600 or more during the tax year. The form includes the total payments you have made to this person or business during the year.
You don't usually withhold federal income taxes or Social Security/Medicare taxes from these non-employees, unless you are ordered to take out backup withholding.
Many individuals or businesses can receive a 1099-MISC form. Some types of payments to individuals or businesses include:
- Rent payments by your business to a real estate company
- Services performed by someone who is not an employee (an independent contractor, for example)
- Payments to attorneys (but there are exceptions)
- To a business (like a limited liability company (LLC), sole proprietorship, or partnership. But corporations, including S corporations, usually do not receive a 1099-MISC.
This article on who must receive a 1099-MISC might be helpful to you in sorting out whether a specific non-employee should receive this report.
How the IRS Classifies Workers
Still confused about what form to give workers? It's pretty clear that someone working for you who has a business name, like "Sam's Cleaning Service" gets a 1099-MISC form. But what about a worker who is within your business who doesn't have a separate business name?
Here's a quick run-down of the major differences between employees and independent contractors.
The IRS uses three general criteria to determine whether an individual is an employee or an independent contractor: behavioral control, financial control, and the relationship between the worker and employer.
Does the company control what the worker does and how, when, and where the worker does it? If so, this is behavioral control.
Think of it as hiring someone to create a website for your business. Yes, you're telling him what you want to be done, preferably outlining the job in a contract, but the person is a professional who will use creativity and knowledge of internet protocols to come up with a website.
You don't control when that independent contractor works on creating your website. The person doesn't report to your place of business at hours you specify. You can't tell them to stop working on the website for a while and report to a shorthanded department to help out there.
Financial control applies in part to how the individual is paid. If the worker is an employee, it's up to you as the employer when the worker is paid and how much she is paid. It also applies to a person's opportunity for profit or loss. You have financial control over the work the person does for you.
Type of Relationship
The type of relationship between you and the worker might be determined by whether the person's duties are a key part of the business and whether the person receives benefits. If you and the other party have a written contract, that might be a factor.
The IRS says that a contract stating that a worker is an employee or independent contractor is not enough to determine the worker's status.
What if Someone is Both an Employee and an Independent Contractor?
Sometimes people who work for your company may have dual roles. For example, Joe might work as a custodian (employee), and he might also have a contract with you to do snow plowing (independent contractor). He would receive a W-2 for his employment income and a 1099-MISC for his pay as owner of his snow plowing business.
Where and When to Submit 1099-MISC and W-2 Forms
W-2 forms are due to the employee no later than January 31 of the year after the tax year. The forms must also be sent to the Social Security Administration by this January 31 date.
1099-MISC forms are due to non-employees by January 31 of the year after the tax year, You must send an independent contractor a 1099-MISC if you paid them $600 or more during the year.
You must also submit 1099 forms to the IRS by January 31, You don't report withholding, Social Security, or Medicare wages on a 1099-MISC because you don't usually withhold income taxes for independent contractors.
The Easy Way: You can submit both W-2 forms and 1099-MISC forms online to the appropriate federal agency. The deadline for online submissions is still January 31 of the year following the tax year.
IRS Form W-2. Accessed Nov. 4, 2019. https://www.irs.gov/pub/irs-pdf/fw2.pdf
IRS. "Instructions for Form 1099-MISC." Specific Instructions, Page 1. Accessed Nov. 7, 2019.
IRS. Instructions for Form 1099-MISC. "Specific Instructions," Page 1, Accessed Nov. 4, 2019. https://www.irs.gov/pub/irs-pdf/i1099msc.pdf
IRS. "Understanding Employee vs. Contractor Designation." Accessed Nov. 4, 2019. https://www.irs.gov/newsroom/understanding-employee-vs-contractor-designation
IRS. "Behavioral Control," Accessed Nov. 7, 2019.
IRS. "Financial Control." Accessed Nov. 7, 2019
IRS. "Type of Relationship." Accessed Nov. 7, 2019.
IRS. "When would I provide a Form W-2 and a Form 1099 to the same person?" Accessed Nov. 4, 2019. https://www.irs.gov/government-entities/federal-state-local-governments/when-would-i-provide-a-form-w-2-and-a-form-1099-to-the-same-person