If you’re a business owner, you will likely be working with a W2 or a 1099, or both. And if you have a team, you may also be filing W2s and 1099s for the people who work for your business. Now you may be wondering– W2 vs 1099? What’s the difference?? Both forms are considered information returns and both report income received BUT they are used for entirely different things. And that’s what we’re here to explain!
Employers use Form W-2 to report wages, tips, and other compensation paid to employees throughout the year. Aka what income they are receiving. This form also lists the employee’s withheld social security, Medicare, Federal, State, and local taxes. Now here’s something to pay attention to…if you have employees, you’ll need to file W2s for them before January 31, that way they can have them available to start on their own tax returns. If your business is an S Corp, don’t forget that you’ll need to make sure that you issue yourself a W2 too.
Payments to contractors who are not employees are reported on Form 1099-NEC. Emphasis on NOT employees. Since these forms are for nonemployees, you won’t see any tax withheld amounts. 1099s should be given to anyone that you paid over $600 for services during the year. Although (surprise surprise) there are some exceptions to that rule.
Corporations (S Corps, C Corps, and LLCs taxed as corporations) do not need to be issued a 1099. You also don’t need to file a 1099 for anyone who you paid via a payment processor (like Venmo, Stripe, or Paypal), since the payment processing company will file the 1099 for them.
Additionally, 1099s aren’t required for companies or individuals that you purchased physical products from. However, it’s worth noting that lawyers and landlords should always be issued 1099s if they are paid at least $600, regardless of business entity status or payment method.
So what’s the main difference between a W2 and a 1099? Form 1099 is for contractors and the W2 is for employees. So before it’s time to file, it’s crucial to understand whether your workers are employees or contractors, you can use our flowchart in our Guide to 1099s or on our Instagram. And if you’re still not sure, or need help filing those forms, we can help! Reach out to us and we’ll get you the help you need.
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