What Are 1099 Workers?

1099 workers work independently and offer their services to clients or businesses. They are also known as 1099 contractors or freelancers. These workers are not classified as full-time employees who earn a salary. Let’s understand the meaning of a 1099 employee with an example. For instance, a company that hires a freelance graphic designer will be considered an independent contractor, not a 1099 worker.

Types of 1099 Workers

There are various types of 1099 workers, and each works independently of the others. However, they are different from each other:

Consultants

Consultants are consultancy service providers that offer consultancy according to their specialization. Also, they possess high knowledge and experience. Thus, they demand a high amount of consulting charges.

Freelancers

Freelancers work on a per-project basis within an organization. They charge based on work hours or any other specific set. Their working style is quite flexible and is not bound by the organization’s timing. Although they work in a flexible domain, knowing how many working hours are in a year helps them to compute billable hours & financial forecast.

Gig Workers

Gig workers are identical to freelancers but possess a different payout scenario. Their working role is quite small, and they work on a particular project for a short period.

Independent Contractors

Independent contractors also work independently and manage a specific task for the company. They are not regular employees and manage their work, expenses, and taxes. These contractors have significant control over how, when & where the work is done.

What Is a 1099 Form?

A 1099 form refers to a tax document primarily used in the US. Generally, businesses use this form to report all payments made to independent contractors or freelancers. In simple terms, this form is issued by the payer to the recipient. It reports the non-salary income to the IRS.

How to Fill out a 1099 Form? Key Steps

Along with understanding the difference between W-2 and 1099, you must be aware of how to file 1099 taxes. Here are the steps to follow when it comes to filling out the form:

1. Get the Form

Obtain the 1099 form from the IRS or an office supply store, such as Office Depot, Staples, or Amazon. It is not possible to print Copy A from the website because there is a red ink version that is only scannable in its official print.

2. Fill in the following required information

• • Payer’s Info: Business name, address, phone number, and Employer Identification Number (EIN).
  • Receipt’s Info: Contractor’s legal name, address, and Social Security Number (SSN) or Taxpayer Identification Number (TIN).
  • Payment Details: This refers to the total amount paid to the contractor at the end of the tax year.

3. Filling of the Boxes

There are separate conditions for filling out the boxes for 1099-NEC and 1099 Miscellaneous:

3.1. For 1099-NEC

• • Box 1 – Fill in the total amount of non-employee compensation payment.
  • Box 2 – Enter an ‘X’ in this checkbox for the sales made by you of a total $5,000 or above.
  • Box 3 – Can be left blank
  • Box 4 – Federal income tax withheld.
  • Box 5 & 7 – Entire state information.

3.2 For 1099 Miscellaneous

Always use the relevant boxes for royalties, rent, and prizes.

4. Send the Copies

• • Copy A – Send to the IRS
  • Copy B – Send to the contractor
  • Copy C – Keep it for the records
  • Copy 1 – If necessary, send to the state tax department

What Are the Rules for 1099 Employees?

The following are the points reflecting the 1099 employees’ rules:

• • They can work for multiple clients simultaneously.
  • 1099 employees are not subject to employment taxes from the company’s side. Instead, these employees are responsible for filing self-employment taxes.
  • These employees are not eligible for workers’ compensation and unemployment insurance coverage.
  • Employees need to cover their expenses.
  • These employees are subject to flexibility in their working strategy.

What Is a W-2 Employee?

W-2 Workers are those workers that the company hires on a full-time or part-time basis. The W2 employee refers to those employees who receive various other benefits from the company, including health insurance, paid leave, and retirement plans, in compliance with applicable laws.

The roles and engagement of these employees with the company are longer than those of 1099 workers. Legal practices, including minimum wage laws, overtime rules, & pay schedules, govern the payroll operation for these employees.

What Is a W-2 Form?

The W-2 form, also known as a Wage and Tax Statement, is a tax document that employers provide to their employees annually. It also includes the Social Security and Medicare taxes. This document reports the total earnings and tax information. Generally, it is issued on 31st January of each year. The Internal Revenue Service uses this form to verify income and the amount of tax that has been paid.

How to Fill out a W-2 Form?

The W-2 form is useful for reporting the employee’s wages and tax withholding to the IRS. Completing the W-2 form is quite similar to completing the 1099 form, but the main difference lies in filling out the boxes and distributing the copies.

1. Get the Form

As an employer, you can obtain the official W-2 form through the SSA website. You can also contact the IRS and request that they mail the form to you. The alternative method is to obtain the IRS-approved form from office supply stores, such as Office Depot and Staples.

2. Fill in the Required Information

• • Employer details: Name, address, and Employer Identification Number (EIN).
  • Employee details: Customer’s Name, address, and Social Security Number (SSN).
  • Payroll details: Tips, wages, and other compensation with tax withholdings.

3. Filling out Each Box

In the W-2 form, there are more boxes that you need to fill in. There are alphabetic boxes from A to F and numerical boxes from 1 to 20.

3.1 Top Boxes (A-F)

• • Box A – Employee’s SSN
  • Box B – Employer’s EIN
  • Box C – Name of the employer, address, and ZIP code
  • Box D – Control number (if applicable)
  • Box E to F – Employee name, address, and ZIP code

3.2 Boxes 1-6 – Federal Wages and Tax Details

• • Box 1 – Total taxable wages, tips, & other compensation
  • Box 2 – Federal income tax withheld
  • Box 3 – Social Security wages
  • Box 4 – Social security tax withheld
  • Box 5 – Medical wages and tips
  • Box 6 – Medical tax withheld

3.3 Boxes 7-8 – Social security tips and allocated tips

3.4 Box 9 – Not used

3.4 Boxes 10 to 14

• • Box 10 – Dependent care benefits
  • Box 11 – Nonqualified plans
  • Box 12 – Special codes
  • Box 13 – Checkboxes for statutory employee
  • Box 14 – Other information related to union dues and education assistance

3.5 Boxes 15 to 20 – State and Local Tax Details

• • Box 15 – State & employer’s state ID number
  • Box 16 – State wages, tips, etc
  • Box 17 – State income tax withheld
  • Box 18 to 20 – Information about local wages, taxes withheld, and locality name

4. Distribution of Copies

• • Copy A – Share it with the Social Security Administration (SSA)
  • Copy B – Share it with the employee for the federal tax return
  • Copy C – Share the copy with the employee to keep the records.
  • Copy D – Keep it for employer records
  • Copy 1 – Send it to the state tax department (if applicable)
  • Copy 2 – Give to employee (for state/local tax return)

5. File with SSA

You can file it with SSA by choosing paper-based or electronic filing. For paper filing, send Copy A along with Form W-3. You can use SSA’s Business Services Online (BSO).

Difference Between 1099 Workers and W-2 Workers

So far, we have covered the right definition of 1099 employees and W-2 employees. In this section, we now cover the information on 1099 vs W-2 employees.

Difference Between 1099-NEC Form and W-2 Form

So far, we covered the guide on W-2 vs 1099 employees in the above section. Furthermore, we examine the difference in the form they fill out. The 1099-NEC and W-2 forms are two distinct tax forms commonly used in the USA.

Here are the key points for a better understanding of the W-2 form vs the 1099:

Why Is It Necessary to Classify Workers Correctly?

Proper classification is beneficial for the employers. Misclassification can result in significant legal and financial implications. Also, it negatively affects the company’s reputation. Here is the proper breakdown for the correct understanding:

Financial Impact

The misclassification triggers penalties, such as unemployment taxes and back wages. Misclassifying an employee as a contractor can result in underpayment of payroll taxes. The IRS may take these actions and could even pursue legal sanctions. The penalties for unpaid employment taxes can increase.

Benefits Disability

Full-time employees are eligible to take advantage of various employee benefits, including medical insurance, paid leave, and other perks. Misclassification can prevent employees from receiving these benefits. Also, it could lead to labor department investigations and lawsuits.

Smoothing Business Operations

Classifying the workers correctly also helps in proper workforce planning and management. Employers have clarity over the resource planning. Additionally, there is a more effective plan for salary, benefits, and tax costs when it is clear who is a 1099 worker and who is a W-2 worker.

Important Deadlines for Filing W-2s and 1099s

So far, we have covered the information on W-2 vs 1099. As an employer, you must be aware of the important deadlines for filing W-2 and 1099. The typical last date for filing these forms is January 31st of the year following the year of payment. The mode of filling the form can be electronic or paper.

However, if the business misses the deadline, the alternative option is to file Form 8809 and request a 30-day extension. However, the IRS doesn’t provide this extension automatically. Here are the five key factors applicable to this extension:

1. There was a natural disaster or fire that affected the business operation.
2. The responsible person for filling the form suddenly got a serious illness or died.
3. The form filler did not receive the data needed to complete the form on the third-party statement.
4. Any horrific event has occurred in a federally declared disaster area.
5. The filing marks the business’s first-year information return.

The due date can also be moved to the next business day when the deadline falls on a federal holiday or weekend.

How to Make the Correct Classification?

A clarification is necessary for the business regarding the classification of workers. Whether you are classifying the worker as W2 or 1099, it should be correct. Here are ways to make the perfect classification:

IRS Common Law Rules

For accurate worker classification, one can refer to the IRS guidelines for assessing the amount of control.

Financial Control: On the basis of your financial control, you can have clarity of classification. The classification is W-2 when the expenses are reimbursed. Whereas, if the worker incurs their expenses, it is classified as a contractor arrangement.

Behavioral Control: As an employer, when you have full control over your workers, they are referred to as employees and are eligible for federal tax purposes. On the other hand, if the workers possess freedom in their work, they are referred to as contractors.

Relationship: When the employer has an ongoing relationship with the worker, it is referred to as full-time employment. Thus, work arrangements are considered. Additionally, in such cases, you offer various benefits, including paid leave and insurance. Independent contractors are not eligible for these benefits. Always look for the entire relationship between the worker and the employer. This helps define the exact types of workers.

DOL Economic Reality Test

The Department of Labor employs the economic reality test for classifying employees. It determines whether the Fair Labor Standards Act covers workers. The following factors work better under this test:

• Individuals’ opportunity for profit and loss
• Permanency of the employment
• The degree & nature of control
• Check out whether the work performed is a core part of the employer’s business.
• Skill and initiative

Equal Employment Opportunity Rules

There are some considerations under the Equal Employment Opportunity Commission. Here are the points:

• Is the worker engaged in their occupation or business?
• Does the employer have the power to terminate the worker’s employment?
• The worker is never engaged in their distinct occupation.
• Does any employer-employee relationship feeling exist?

Individual State Employee Classification Test

Some states set their tests. Many states determine whether an individual is covered under employment insurance or is eligible for wages. Some of the states adopt the ABC test, which is stricter than the common law test. The test is useful for determining whether a worker is eligible for unemployment insurance and for compliance with wage and hour laws. According to this test, a worker is presumed to be an employee unless all the following criteria are met:

• The worker is not under the control & direction of the organization.
• The workers’ performance is not within the normal course of the organization’s business.
• The worker is typically engaged in any independent established trade or any other business of the same nature.

Wrapping Up

It doesn’t matter what kind of business you run, but it matters whether you make a correct classification or not. A correct worker classification can safeguard your business from penalties and legal actions, and it is only possible when you have a clear understanding of 1099 vs W-2. There are different scopes of work for both 1099 and W-2 workers. 1099 offers flexibility and a cost-effective employment solution, whereas W-2 workers tend to be more stable and loyal to their employers. Therefore, select the most suitable one for your business.

FAQs on 1099 vs W-2