Are you a freelancer who's just starting out or a company that’s just finding its footing? There are probably a plethora of questions you have. And one of the biggest is probably about money. For a freelancer or contractor, one of the big questions is how you are going to get paid (and how are you going to file taxes for what you get paid.) For a company or business — big or small — the questions center around how exactly to pay employees — especially when these workers aren’t full-time employees with salaries and benefits. Because when it comes to work-from-home freelancers and independent contractors, the forms that need to be filled out vary. And differentiating between the two can sometimes be hard work.
When it comes to paying your employees and contractors, there are a few different forms to use. Here, we'll discuss two major forms: the W2 and the 1099 form. Both are wage statements that need to be sent to the Internal Revenue Service (IRS), but their purposes and the types of workers for which they are used differ.
In short, one is for employees who are under direct supervision of the company, and one is for non-employees or independent contractors who essentially control all aspects of how and when they complete a project.
As you can see, the language can be a bit tricky when it comes to 1099 v W2s.
So here’s the big question. 1099 v W2 — if you’re a business, what form do you use and if you’re an independent, self-employed individual selling their services, which form makes the most sense? It’s important to get this sorted out because otherwise, you’ll have a lot of explaining to do to the Internal Revenue Service (IRS) when it comes time to file tax returns. And even if it was just an accident, it can really cost you. To get a better understanding of the two forms, here’s a quick and simple breakdown.
What is a W2?
A W2 is a financial form that an employer has to fill out. The employer then sends this form to the Internal Revenue Service (IRS) and the employee at the year’s end. In this document, an employee’s annual wages and a breakdown of the taxes that were taken out are documented. A big difference between the W2 and the 1099 is that when an individual fills out a 1099, they are required to figure out their taxed income at the end of the year. If you’re a freelancer, your take-home pay doesn’t have your income tax, social security and medicare tax, payroll tax, or any other taxes taken out so you have to figure that out for yourself. If you have a W2 then your taxes are already being removed. A W2 must also be sent to an individual before January 31 to ensure they can properly fill out their tax returns.
In order for the employer to complete the W2, the company will have the employee complete a W4 when she begins a new job or experiences changes (known as life-changing events) to her financial situation. This form allows the employee to designate federal income tax witholdings based on personal situations, such as marital status and number of children.
Based on the information from W4s, a W2 must be distributed to all employees that make a salary, wage, or any other type of compensation. But this is where it gets tricky — a W2 form isn’t required for non-employees or workers that are self-employed. This includes freelancers and independent contractors. This is because a W2 employee is under direct supervision by the company itself. They work much like a regular salaried employee. They usually work at least 20 hours a week, and tend to work in-house. They are part of the everyday workings of the company itself and often work across departments and up the chain of command. They are more a part of the everyday culture and business. An independent contractor or freelancer can work whenever, wherever, and has full control over the project they are completing.
A 1099 form is a series of documents that have all your wage information filled out in them. They are sent to you and the IRS at the end of the year documenting how much money you’ve earned. These are for independent contractors, and you will only receive a 1099 come January if you made more than $600 for any company or organization. Like the W2 form, the 1099 is vital when it comes to filling out taxes. Once you file, you will then have to pay an income tax on it which wasn’t taken out of your original take-home pay. You will also likely have to pay a self-employment tax. Even if the self-employment income you make makes you a full-time equivalent employee, you will still not get taxed for it until the end of the year.
Some examples of independent contractors include: freelance writers or editors, ride-sharing drivers, consultants, freelance designers, artists, and any other individual that is a outsourced by a company to complete a task or service that is entirely up to them to finish as they will.
The differences between these two forms is both obvious and vague at the same time. Both forms are filled out by an employee for tax purposes, but it’s the employer-employee relationship that separates the two. If you’re a full-time employee, or an employee that is controlled by the company — they tell you how to perform a task or project and supervise over its completion, then you will likely receive a W2 at the end of the year. This means that your company is taxing your income directly. If you are self-employed and are hired as an outside contractor, you will receive a 1099 at the end of the year which you will then need to pay taxes on. And you will likely have to pay an added self-employment tax on top of the income tax and other taxes that are required. But the 1099 gives you more freedom to do your job in the meantime.
Many people will receive both forms if, for instance, they are salaried employees at one business and also have side hustles. Under some very unusual circumstances, an employee may receive both a W2 and a 1099. For this to be legal, the employee must meet the following circumstances, according to Collabrus:
- The employee has a legitimate independent business
- She has other clients not connected to the employer
- The work as an independent contractor is not the same or similar to the work she does as an employee
- When doing the 1099 work she must meet the common law test as an IC
For example, if you work in sales full-time in one department and do freelance writing for another department in a large company, you may receive both forms.
While it all does come down to employer-employee relationships, a company can’t get these forms wrong. If an employer fills out a 1099 when they should have filled out a W2, the IRS can start an investigation. It is definitely a case-by-case basis. You might need a freelance consultant to work on a project themselves, while also needing to hire someone to help the team with the actual physical execution in-house. In these instance, you have one independent contractor, and one hourly employee. But if you can differentiate between the type of employee you’re adding to the payroll, you're in the clear!