W-2 vs 1099 Tax Forms: What You Need to Know 

When it comes to managing payroll and filing taxes, employers must have a strong understanding of W-2 and 1099 tax forms – from how they differ, to how they’re correctly applied. 

Achieving and maintaining compliance with legislation around 1099 and W-2 tax forms is crucial to the success of your business. Incorrectly categorizing employees or contractors can lead to costly penalties, tax complications, and compliance risks.  

Why understanding W-2 and 1099 tax forms is essential  

Whether you’re running payroll or contracting services, you’re not just managing payments—you’re also navigating legal responsibilities tied to worker classification.  

As an employer, you must decide whether a worker on your payroll is classified as an employee (W-2) or a contractor (1099). The onus is on the employer, not the worker, and misclassification can result in hefty IRS penalties and back taxes.  

For businesses aiming to operate efficiently while staying compliant, getting this classification right is non-negotiable.  

The Difference Between W-2 and 1099 tax forms 

Part of being an employer is accurately determining whether a worker on your payroll is classified as an employee or a contractor.  

While employees receive the W-2 tax form, independent consultants and freelancers receive the 1099 tax form. 

It’s up to the employer, not the worker, to get it right – so we’ve compiled some of the key differences between employees and contractors, so you can make the right call. 

What is a W-2 tax form?  

In the U.S., the W-2 is a wage and tax statement issued annually to employees who earned at least $600 from an employer during the year. 

The W-2 form summarizes the total annual wages paid and all tax withholdings (including for federal, state, and local governments), Social Security, and Medicare taxes. 

What kind of worker receives a W-2 tax form?  

W-2 tax forms are issued by employers to their employees; workers who are on the company’s payroll on a permanent basis. 

Employees who receive W-2 tax forms (often referred to as W-2 employees) typically work under their employer’s direct supervision, use company resources, and will often be required to follow specific work schedules.   

Some examples of W-2 employees include: 

• Office admins with set 9-to-5 schedules  

• Warehousing staff operating company machinery  

• Customer service reps working regular shifts  

Another key distinction is if a worker is classified as a W-2 employee, their employer will withhold and pay payroll taxes on their behalf.  

How are W-2 tax forms submitted? 

Employers must send copies of their employees’ W-2 forms to the Social Security Administration (SSA) and relevant tax authorities by January 31 of every tax year, to ensure accurate reporting. 

Generating and submitting accurate W-2 tax forms is an important part of any company’s year-end payroll reporting activities. Check out our free year-end payroll reporting guide for more insight into exactly what’s required. 

Employers are also required by law to provide employees with personal copies of their W-2 forms, which the employee can then use to help complete their tax returns. 

What is a 1099 tax form?  

A 1099 form is a tax document used to report income issued for independent contractors, commonly referred to as 1099 workers. 

Unlike a W-2 tax form (typically given to full-time employees), the 1099 is provided to independent contractors, freelancers, gig workers, or anyone paid for services where there is no permanent contract of employment in place.  

The 1099 forms include the total amount paid to the contractor over the tax year. Tax withholdings are not included, as independent or self-employed contractors handle their own tax and benefit calculation.  

The forms may also cover various income sources, including investments, real estate transactions, and canceled debts.  

What is a 1099 worker?  

1099 workers are independent contractors who provide services to businesses but operate outside of the traditional employer-employee relationship. 

Examples of 1099 workers might include: 

• Freelance graphic designers or writers  

• Personal trainers or coaches hired for specific sessions 

• Electricians contracted to fix issues on an ad hoc basis. 

When an employer or business chooses to pay for the services of an independent contractor, they will use a 1099 tax form to document the funds used to pay that contractor; hence these contractors are known as “1099 workers”. 

Employing 1099 workers 

1099 workers tend to be self-employed, handling their own taxes and benefits.  

When businesses work with independent contractors, they avoid withholding taxes or paying for benefits such as health insurance, pensions, or worker’s compensation. The contractor is responsible for reporting all earnings to the IRS and paying applicable self-employment taxes.  

However, because contractors aren’t permanently on the payroll, employers need to provide 1099 tax forms to accurately record how, when, and in what capacity these independent professionals are paid. 

How are 1099 tax forms submitted? 

Businesses must provide 1099 forms to recipients by January 31 of the following year, with submission deadlines to the IRS differing for paper versus electronic filings.  

As with W-2 tax form submission, including accurate 1099 forms for your employees is a crucial part of year-end payroll reporting.  

As an employer, you may need to provide specific types of 1099 forms. Frequently used types include the 1099-MISC for miscellaneous payments like rent or awards and the 1099-NEC for non-employee compensation.  

How to correctly classify 1099 and w-2 workers

When it comes to classifying your workers correctly, there are multiple reliable resources for you to refer to. 

• IRS Common Law Rules – Rely on insight from the IRS to reflect on behavioral control, financial control, and the nature of the relationship. 

• The US Department of Labor Economic Reality Test – This test helps determine worker coverage under wage laws, considering factors like control, permanency, and profit opportunities. 

• State tests (e.g., ABC Test) – Look to state-specific guidelines on classifying your workers correctly. 

As a general rule, if you are unsure how to classify your worker(s), it’s best to err on the side of caution and classify your worker as a W-2 employee. However, you can also consult a tax specialist for absolute clarity. 

What happens if you misclassify a W-2 employee as a 1099 worker? 

Misclassifying a temporary worker or contractor (1099 worker) as a permanent employee isn’t ideal. Instead of receiving the correct 1099 form, they’ll be issued a W-2 form. This will cause confusion, reputational damage, and may even cost you a few bucks. 

However, misclassifying a permanent employee (who ought to receive a W-2 form) as a contractor who’s only working for you on an ad hoc or temporary basis is a serious breach of the law. 

By intentionally misclassifying a W-2 employee as a 1099 worker, an employer may intend to avoid paying relevant employment taxes or adhering to federal or state minimum wage laws, for example. 

What are the penalties for misclassifying a W-2 employee? 

From investigations from the IRS to financial penalties, misclassifying a W-2 employer as a 1099 worker can have serious consequences on you as an employer, including: 

• Fines for failing to file proper tax forms ($60–$330 per form) 

• Reimbursement of taxes not withheld, including Social Security and Medicare contributions.  

• Additional penalties of 20–40% of accrued taxes if misclassification was intentional.  

If the Department of Labor suspects a misclassification was willful (for example, there’s evidence of an existing pattern of behavior) the employer may even face criminal charges. Affected workers may even seek recompense through civil lawsuits, which can affect a company’s public image. 

Using managed services to issue 1099 and W-2 tax forms 

Properly distinguishing between W-2 and 1099 workers enables smooth payroll management and compliance while avoiding costly mis-classification penalties. Whether you employ traditional workers or hire contractors, understanding employment classifications is essential.  

If you’re looking for expert support with simplifying payroll, managing compliance, and issue W-2s or 1099s with ease, explore IRIS payroll services today. Stay ahead of payroll complexities and keep your business operations running smoothly with IRIS.