Which Form to Report Income—W-2 or a 1099?
Are you paying an employee or an independent contractor?
Businesses must submit annual wage reports to anyone who works for them, and they must file these reports with the Internal Revenue Service (IRS) or with the Social Security Administration (SSA) as well, depending on their relationship with the worker. These statements detail income for employees and independent contractors for tax purposes so workers can accurately file their income tax returns.
You must first determine whether someone who works for your company is an employee or a nonemployee so you know which report form to give that individual.
Independent Contractors vs. Employees
The IRS uses three general criteria to determine whether an individual is an employee or a nonemployee, commonly referred to as an independent contractor: behavioral control, financial control, and the relationship between the worker and employer.
#1: Behavioral Control
Does your 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 them what you want done, preferably outlining the job in a contract, but the person is a professional who will use their expertise to come up with a website.
You don't control when that independent contractor works on creating your website. The individual 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.
#2: Financial Control
Financial control applies to how you pay the individual. It's up to you when an employee is paid and how much they're paid. A nonemployee or independent contractor would tell you what they're charging you in exchange for performing certain services. You have the option of paying them that amount or finding someone else to do the work.
Financial control also applies to a person's opportunity for profit or loss. You have financial control over the work an employee does for you.
#3: Type of Relationship
The type of relationship between you and the worker can be determined by whether the person's duties are a key part of your business, and whether the person receives benefits, such as vacation time or health insurance coverage. If so, they're almost certainly an employee.
It might be a factor if you and the other party have a written contract, but the IRS indicates that simply having a contract that states that a worker is an employee or an independent contractor isn't sufficient to determine the worker's status.
You can file Form SS-8 with the IRS to ask the agency to determine for you whether a certain individual is an employee or a nonemployee.
W-2 Forms for Employees
W-2 forms are provided to individuals who classify as employees. The form includes:
- Taxable income for the employee and how much federal income tax has been withheld from the employee's paychecks
- Social Security and Medicare income and FICA taxes on this Social Security and Medicare income, and the amount of these taxes that have been withheld from the employee's paychecks
- State income and state income taxes, and the amount withheld from the employee's paychecks
- Employee tip income
- Taxable and non-taxable employee benefits
1099-NEC Forms for Nonemployees
Form 1099-NEC replaces Form 1099-MISC as of the 2020 tax year, but only for independent contractors. Other entities that you pay might still require Form 1099-MISC forms, but independent contractors have their own form effective 2020.
Form 1099-NEC is given to individuals 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 made to this person or business during the tax year.
You wouldn't withhold federal income taxes or Social Security/Medicare taxes from these nonemployees unless you're ordered by the IRS to take out backup withholding.
Individuals who should receive a 1099-NEC form if you paid them $600 or more include:
- Nonemployees such as an independent contractor
- Attorneys under some circumstances
- Anyone in the business of catching fish from whom you've purchased fish or "other aquatic life"
Other individuals or entities who used to receive a 1099-MISC would still receive a Form 1099-MISC. They're not migrated to this separate form.
When Someone Is Both an Employee and Contractor
Some people who work for your company might have dual roles. For example, Joe might work as a custodian as an employee, and he might also have a contract with you to plow snow from your parking lot as an independent contractor. Joe would receive a W-2 for his employment income and a 1099-MISC for his pay as the owner of his snow-plowing business.
Where and When to Submit the Forms
W-2 forms are due to the employees no later than January 31 of the year after the tax year. W-2 forms must also be sent to the Social Security Administration by this date.
1099-NEC forms are due to non-employees by the same date. You must also submit 1099 forms to the IRS by January 31. You wouldn't report withholding, Social Security, or Medicare wages on a 1099-NEC because you don't withhold these taxes for independent contractors.
You can submit both W-2 forms and 1099 forms online to the appropriate federal agency. The deadline for online submissions is still January 31 of the year following the tax year.
NOTE: Tax laws change periodically. You should always consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.
IRS. "Behavioral Control." Accessed Sept. 23, 2020.
IRS. "Financial Control." Accessed Sept. 23, 2020.
IRS. "Type of Relationship." Accessed Sept. 23, 2020.
IRS. "Understanding Employee vs. Contractor Designation." Accessed Sept. 23 2020.
IRS. "Form W-2 Wage and Tax Statement." Accessed Sept. 23, 2020.
IRS. "Instructions for Forms 1099-MISC and 1099-NEC (2020)." Accessed Sept. 23, 2020.
IRS. "When Would I Provide a Form W-2 and a Form 1099 to the Same Person?" Accessed Sept. 23, 2020.