Form 1099 vs. Form W-2: How to Classify Employees Correctly

Contractor or employee? With 57 million workers, or 36 percent of the U.S. workforce, participating in the gig economy, the line between contractors and employees has never been blurrier. The tax filing implications are even more complicated.

Here’s everything you need to know about the Form 1099, Form W-2, and classifying your employees correctly.

What is the Form 1099?

The Form 1099 is an IRS tax form submitted annually for independent contractors earning more than $600 in a calendar year. The form’s submission deadline is January 31, or the following business day should the date fall on a weekend. Employers must file the form to the IRS and distribute it to contractors.

While there are many variations of the Form 1099, the most commonly used form for independent contractors is the Form 1099-MISC, which is used for reporting miscellaneous income. In addition to including the worker’s personal information, the form summarizes any royalties, taxes withheld, payments made, and additional compensation earned.

Employers do not need to submit a Form 1099-MISC for workers earning less than $600 in a given tax year. Those workers will have to report any income earned under $600 from your organization when filing their personal taxes.

What is a Form W-2?

The Form W-2, or the wage and tax statement, is a critically important form that employers must submit annually to the IRS. The document summarizes an employee’s yearly wages, tips, and withheld taxes. Similar to the Form 1099-MISC, the deadline for submitting the Form W-2 to the IRS and employees is January 31. Employees then use the form when filing their personal taxes.

Determining Independent Contractor or Employee

Determining which workers are independent contractors and employees is one of the most challenging aspects of mastering these tax forms. The IRS has published some general criteria to guide your classification process. The threat of fines and penalties for improperly classifying workers means you’ll want to get it right the first time.

While some state tests differ, the federal classification test considers these three categories: behavioral, financial, and relationship. Each category has important questions you need to consider.

Behavioral
• Does the company control or have the right to control what the worker does?
• Does the company have a say in how the worker does his or her job?

Financial 
• Does the company control how the worker is paid?
• Does the worker get to choose their own tools and supplies?

Relationship
• Does the company provide the worker with benefits?
• Will the relationship continue once the project is complete?
• Is the work performed part of a key aspect of the business?

While no single question can point to whether a worker is an employee or an independent contractor, generally more “no” answers suggest the worker is a contractor. That said, employers have to weigh all the factors to determine worker classification. If employers are still struggling to define the relationship, they can submit a Form SS-8, or Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, to have the IRS review the case and determine the worker classification.

Whether you’re a full-time employee or contractor, everyone loves payday. For those who aren’t responsible for payroll processing, getting paid on time, every time might seem like magic. When the dust settles, individuals are left with slips of paper to help make sense of it all: their paystubs.

While the humble paystub includes some of the most important information an employer can convey, it’s woefully misunderstood. In our guide, How to Read Employee Paystubs, we break down the nuances for your employees so you don’t have to.