W-2 vs. 1099: What’s the difference between these tax forms?

You may know that W-2 and 1099 forms are critical for reporting your income and filing your taxes. But what you might not know is how these forms relate to your worker classification – that is whether you’re an independent contractor or an employee. 

Depending on how your job is classified, the Internal Revenue Service (IRS) will require the business you worked for to send you either a W-2 or 1099 (specifically 1099-NEC).

So, which is which? Here’s the difference between 1099-NEC vs. W-2 employee tax forms. If you received:

• a W-2 form, you’re considered an employee
• a 1099-NEC form you’re an independent contractor.

Follow along as we clarify the two and outline the implications for your taxes.

Should you expect a W-2 or 1099 at tax time?

As you’re gearing up for tax time, you may have your eyes out for tax forms coming your way. The W-2 is typically provided by employers to their employees, reporting wages earned, taxes withheld, employee benefits, and other information necessary for accurately filing income taxes. On the other hand, a 1099-NEC form is issued to independent contractors, showing compensation paid for their services.

What is a W-2?

The W-2 reports:

• Wages, tips, employee benefits, and other compensation paid to a W-2 employee
• The employee’s income and Social Security taxes withheld and other information
• Wage information to the employee and the Social Security Administration

It’s required when you work as an employee for a company. You should report this information on your 1040 under W-2 wages (Box 1a on the 2023 form).

What is a 1099?

While there are many types of 1099 forms, the one most commonly issued to independent contractors is Form 1099-NEC (Nonemployee compensation). It reports payments made in a trade or business to either:

• A person who isn’t an employee, or
• An unincorporated business.

This form is required when compensation of $600 or more is paid to the contractor.

Other 1099 forms

1099 contractors may also receive Form 1099-K in addition to or instead of Form 1099-NEC if they receive payments from a third-party settlement organization. For that reason, it’s important to keep complete and accurate records of the services you perform for each business. Other 1099 forms, such as 1099-DIV and 1099-MISC, are used for other purposes — not contract work.

Worker classification is a complex topic. For more information, review our post on how to know if you’re an employee or independent contractor. 

1099-NEC form information is usually used on Schedule C of Form 1040 to report profit or loss from your business.

W-2 or 1099-NEC: What’s the tax withholding difference?

We’ll break down how the tax withholding from your paycheck or earnings based on if you receive Form 1099-NEC vs. W-2.

Say you’ve got your traditional W-2 job. When you’re on an employer’s payroll, your employer withholds a slice of your paycheck for taxes before you see the money. That’s why your take-home pay is slightly less than what you earn.

Now, if you’re a 1099 freelancer or independent contractor, you’ll get a 1099-NEC. Here’s the plot twist: no upfront tax is withheld from these earnings. As a 1099 contractor, you’re responsible for setting aside enough money to cover those taxes when tax time rolls around. And for independent contractors, tax time rolls around four times a year.  That means you’ll need to be  proactive and file quarterly estimated taxes as they apply to you.

Do you pay more taxes as a 1099?

Gig workers receiving 1099-NECs have more responsibilities each tax year.  As a self-employed person, you’re responsible for paying self-employment tax, which covers Social Security and Medicare taxes for yourself. If you’re a W-2 employee, both parties pay a portion of self-employment taxes. So, possibly, 1099-NEC gig workers could owe more taxes than a traditional, W-2 employee.

An example: Feliz and Felicia are life partners. Feliz is a 1099 contractor, whereas Felicia is a W-2 employee. Oddly enough, Feliz and Felicia make the same each year – $50,000 per year. But because Felicia is a W-2 employee, her monthly paychecks are different than Feliz’s. Their take-home pay at year end is also different because Felicia has taxes withheld from her paycheck and Feliz does not. However, Feliz is responsible for an additional 15.3%. The rate is made up of both:

• 4% Social Security tax
• 9% Medicare tax

(For 2023, the maximum amount subject to Social Security tax is $160,200. However, all self-employment income is subject to Medicare tax unless the total self-employment income is less than $400.)

The good news is Feliz:

• Pays self-employment tax on his net income (gross income less ordinary and necessary expenses). Also, he pays the tax on 92.35% of his net income (this helps put self-employment tax on a par with what employees pay).
• Can deduct one-half of the taxes, equivalent to the employer portion when he files his tax return.

Read more about self-employment tax (SE tax) or more details at our Gig Worker tax hub.

Why is it necessary to have a W-2 or 1099?

Having a W-2 or 1099 form is important because it serves as a record of income earned during a tax year. These tax forms are crucial to report earnings to the Internal Revenue Service (IRS) and fulfill tax obligations. Both forms provide:

• A clear picture of income sources
• Aid in the accurate calculation and reporting of taxes
• Ensuring compliance with U.S. tax laws
• Help you avoid potential penalties or legal issues associated with inaccurate or incomplete income reporting

When are W-2s and 1099s sent?

Both W-2 and 1099-NEC are required to be sent by January 31 each year. These timelines are designed to give you enough time to tackle your taxes by the tax deadline.  

Remember, W-2s or 1099s are your ticket to reporting your taxes accurately to the IRS. So, keep an eye on that mailbox around late January!

Note: Other types of 1099s may be sent in February or March. Learn more in our 1099 form overview.

 Where to go for help with tax forms

As you read, 1099 vs. W-2 taxes have nuances. If you’re looking for assistance filing your tax forms to report your income tax accurately and with the most money back, H&R Block can help. Whether you choose to file with a tax pro or file with H&R Block Online, you can rest assured that we’ll get you the biggest refund possible.