What Is The Difference: 1099-NEC vs. W-2?
If you are an employee you have a specific form that will be designated by your employer. You either be a designated employee and be given a W-2 form or non-employee compensation 1099-NEC. The difference between each form means to understand your employment status.
With various ways to earn income, wages and taxes must be paid. So whether you are a freelancer, contractor or an internal employee, taxes and income will be reported. But what is the true difference between the two?
We will dive further into each form and what it means for you as an employee.
What Is A W-2 Employee?
An employee that is hired by a company for internal work will receive benefits and work with hourly or salaried pay. A W-2 tax form will state their annual wages and taxes paid in their yearly income. An internal employee will also see withheld state and federal taxes on every paycheck which will be presented on their W-2.
To have an accurate W-2, one will need to submit a W-4 to their employer. This form includes, name, address, social security number and number of dependents. This will help the employer to report given information to the IRS to withhold the proper amount of taxes.
When you file your taxes at the end of the year, you will have a breakdown of all taxes, social security, and state taxes. You will receive your W-2 which you will use to file your taxes either online or with your tax accountant.
What Is A 1099-NEC Employee*?
*Although not actually an employee
Some companies hire contractors or freelancers to complete work on specific projects or for a short- term need. Since they are not an internal employee with regular hours, they will receive a 1099-NEC form. This form only reports their income and goes to the IRS for tax purposes.
This form will have their name/business name, address and an employer identification number (EIN). The employer does not withhold taxes on the freelancer’s behalf, but they are responsible to estimate the amount of taxes needed. As the employee, you will be responsible for paying your own taxes.
Be sure to have a separate account for tax purposes to simplify all deductions, taxes and expenses.
In Conclusion
The difference between a W-2 and a 1099-NEC can be tricky but it is straightforward. Contractors that work for a 1099 are often self-employed and W-2 workers work for the benefit of a business/company. Once you know your standing, following the proper tax forms is simple. Following all the tax requirements can be worth it to avoid penalties.
If the IRS determines a worker has been misclassified, then additional taxes may be added on. Have clarity before you start working and know which job best suits you for tax purposes. Contact your tax accountant to help you clarify and file your taxes each year.
Credit: Gina Robertson
Proofing and Editing by: Tiffany Slifka