1099 vs. W-2: A guide for employers

A 1099 tax form reports payments made to independent contractors or self-employed individuals, while a W-2 tax form reports employee wages and the taxes withheld from them. Both forms serve tax reporting roles, but their use depends on the worker’s classification.

This guide explains the differences between a 1099 vs. a W-2, important deadlines to keep in mind, and best practices to follow to classify workers correctly and avoid costly mistakes.

What is a W-2?

Employers use a W-2 form to report annual wages they pay to employees and the taxes they withhold from those wages. It’s a key tax document for workers classified as employees because it shows their total earnings and tax deductions for the year.

As an employer, you must provide W-2 forms to your employees by January 31 each year, giving them enough time to file their personal income tax returns.

Since you withhold taxes from each W-2 employee paycheck throughout the year, including federal income tax, Social Security, and Medicare, filing taxes as an employee is often simpler than as an independent contractor, who would handle these payments themselves.

Who gets a W-2?

• Full-time employees who are on payroll year-round
• Part-time employees who receive regular wages and benefits
• Seasonal employees who meet the IRS definition of an employee
• Anyone whose work arrangement is classified as employee status under IRS guidelines, rather than an independent contractor receiving a 1099 form

If you set schedules, provide tools, and oversee how the work is performed, your workers likely fall into the W-2 category rather than the 1099 category.

How to file a W-2

As an employer, you’re responsible for:

• Preparing the form: Include accurate details for wages, tips, and other compensation
• Completing required boxes:
  • Box 1: Wages, tips, and other compensation
  • Box 2: Federal income tax withheld
  • Boxes 3 & 4: Social Security wages and tax withheld
  • Boxes 5 & 6: Medicare wages and tax withheld
• Distributing copies: Provide employees with copies B, C, and 2 of the W-2 by January 31
• Filing with the SSA: Send copy A to the Social Security Administration (SSA), along with Form W-3, by the required deadline

What is a 1099?

Form 1099 reports income paid to independent contractors, freelancers, and other non-employees. Unlike a W-2, it doesn’t include any tax withholding. You pay recipients in full, and they’re responsible for managing their own tax obligations.

As an employer, you must issue 1099 forms by January 31 each year to anyone you’ve paid $600 or more in the previous tax year.

Because you don’t withhold any taxes, 1099 recipients are responsible for paying self-employment taxes covering both the employer and employee portions of Social Security and Medicare and often need to make quarterly estimated tax payments to avoid penalties.

Who gets a 1099?

• Independent contractors hired for specific projects or ongoing work
• Freelancers who provide creative, technical, or professional services
• Vendors or service providers paid outside of payroll
• Any contingent worker who isn’t an employee under IRS guidelines and doesn’t receive a W-2 form

The key distinction is that 1099 workers control how and when they work, provide their own tools, and aren’t entitled to employee benefits.

How to file a 1099

As the paying business, you’re responsible for:

• Preparing the form: Use Form 1099-NEC for reporting payments to non-employee contingent workers
• Completing required boxes:
  • Box 1: Non-employee compensation paid for the year
  • Payer and recipient information: Names, addresses, and taxpayer identification numbers (TINs)
• Distributing copies: Send Copy B to the contractor by January 31 and keep a copy for your records
• Filing with the IRS: Submit Copy A to the IRS, electronically or by mail, along with Form 1096 if filing on paper

Key differences between W-2 and 1099 employees

When you understand that your worker falls under the W-2 or 1099 category, you can calculate your taxes much better and get the hang of benefits. Here are the key differences between tax withholding and reporting, benefits and protections, and legal and financial implications:

Tax withholding and reporting

One of the biggest differences between W-2 and 1099 workers is how taxes are handled:

W-2 workers

As an employer, you must withhold federal income tax from every paycheck based on the employee’s W-4 form, along with Social Security and Medicare taxes, also known as FICA taxes, totaling 7.65% of wages.

You’ll match this amount as an employer. So if an employee earns $50,000 a year, your share of FICA would be $3,825. You may also be required to withhold and pay state and local income taxes.

In addition, many states require employers to contribute to unemployment insurance programs. At year-end, you must provide a W-2 form to each employee by January 31, detailing their earnings and tax withholdings, and file copies with the SSA.

1099 contractors

When you hire 1099 contractors, they receive full payment for their work and are responsible for managing their own taxes. This includes reporting all taxable income to the IRS, even if they work for multiple clients.

If you pay a contractor $600 or more in a year, you must issue a 1099-NEC form by January 31. They also pay self-employment taxes, covering both the employer and employee portions of Social Security and Medicare, at a combined rate of 15.3%, and can deduct the employer portion on their personal tax returns.

Contractors are responsible for federal income taxes and, in some cases, state taxes. Many make quarterly estimated tax payments to avoid penalties. Your role as an employer is simply to provide accurate and timely 1099 forms.

Benefits and protections

W-2 employees are eligible for benefits such as health insurance, retirement plans, paid leave, and workers’ compensation coverage. Offering these perks can help attract and retain talent, but it also adds to labor costs.

1099 contractors don’t receive employer-provided benefits. They set their own schedules and rates, and while this gives them flexibility, it also means they must secure their own health insurance, retirement savings, and other protections.

Legal and financial implications

Misclassifying workers can result in IRS penalties of up to $1,000 per worker, plus back taxes and interest. The IRS uses three key factors to determine classification:

1. Behavioral control: Focuses on whether you control how the worker performs their job. This includes training, supervision, and specific instructions on when, where, and how tasks are completed.
2. Financial control: Examines who handles the financial aspects of the job. Factors include who provides tools and equipment, covers business expenses, and whether the worker has the opportunity to profit or incur losses.
3. Type of relationship: This looks at the nature of your working relationship. A long-term arrangement with employee benefits suggests W-2 status. A project-based or temporary engagement without benefits aligns with the 1099 classification.

Correct classification protects your business from costly mistakes, ensures compliance with tax laws, and helps you plan payroll and benefits more accurately.

Tax deadlines and compliance

Both W-2 and 1099 forms must be provided to workers and filed with the appropriate agencies by January 31 each year to avoid penalties and ensure smooth tax reporting for your business. Here’s some additional information on when to issue each form, how to stay compliant, and what to watch for to avoid costly mistakes:

When to issue W-2 forms

You must issue W-2 forms to all employees who earned wages during the prior calendar year, whether they were full-time, part-time, or seasonal. You also need to send Copy A of the W-2 to the SSA by January 31, along with Form W-3. W-2s report total wages, tips, and other compensation, as well as federal, state, and local taxes withheld.

When to issue 1099 forms

You must issue Form 1099-NEC to each independent contractor, freelancer, or vendor to whom you paid $600 or more in non-employee compensation during the previous calendar year. You must also send Copy A of the 1099-NEC to the IRS by January 31, either electronically or by mail, with Form 1096 if filing on paper.

Remember that even if a contractor earned less than $600, they’re still required to report all their income to the IRS; your role is to issue the form when the $600 threshold is met.

Avoiding late filing penalties

Missing deadlines or submitting incorrect forms can lead to penalties from the IRS. For example:

• Late filing penalties range from $60 to $660 per form, depending on how late you file, with a maximum penalty of over $4 million per year for large businesses
• Incorrect forms, such as mismatched names and taxpayer identification numbers, can trigger additional fines and IRS notices

Verify all worker information before filing and keep payment records organized throughout the year to avoid mistakes. You may also consider using payroll or accounts payable software to automatically track deadlines.

State-level requirements

Many states have their own reporting rules and may require separate W-2 or 1099 filings in addition to federal submissions. Some states also have different or earlier deadlines than the federal January 31 date.

Always check your state’s tax agency website for specific due dates, filing formats, and additional requirements to ensure you stay compliant at both the federal and state levels.

Pros and cons of each worker classification

Each classification impacts your tax obligations, payroll processes, and how you manage your team on a daily basis. Here are the main pros and cons of hiring W-2 employees vs. 1099 contractors so you can choose the option that best fits your business needs.

Pros and cons of hiring W-2 workers

Pros:

• More control over schedules, task assignments, and performance oversight
• Easier tax compliance since you withhold and remit federal, state, and payroll taxes directly from each paycheck
• Eligibility for benefits such as health insurance, retirement plans, paid leave, and workers’ compensation, which can improve retention

Cons:

• Higher costs due to payroll expenses like taxes and benefits, as well as the equipment and training required for employees to perform their jobs
• More regulations and administrative work, including payroll compliance, tax filings, and benefit administration

Pros and cons of hiring 1099 contractors

Pros:

• Flexible hiring for specific projects or short-term tasks, ideal for fluctuating workloads
• Lower labor costs since you don’t provide benefits or pay employer payroll taxes
• Less administrative work; you issue a 1099-NEC annually instead of running payroll

Cons:

• Less control over how and when work is done, making integration and deadline management harder
• No employer-provided benefits, which can limit long-term loyalty
• Risk of misclassification and potential IRS penalties if contractors are classified as employees

Switching between 1099 and W-2 employment

You might consider switching a contractor to an employee if their responsibilities become more integral to your operations or require a long-term commitment. Similarly, you might move an employee to contractor status if the work becomes more project-based, independent, or short-term in nature. Here’s how to do so:

Switching from a 1099 contractor to a W-2 employee

Review their role to assess how their work has changed. If you now control when, where, or how they work, or if you provide tools and training, they likely qualify as a W-2 employee.

Next, update their written contract by ending the contractor arrangement and issuing an employment offer letter. This letter should outline their salary, benefits, and job expectations.

Onboard the worker by collecting a W-4 form for tax purposes and adding them to your payroll system. Also, enroll them in eligible benefits, such as health insurance or retirement plans.

Switching from a W-2 employee to a 1099 contractor

Before making this transition, you must confirm that the worker meets the IRS criteria for independent contractors, which include controlling their work schedule and operating independently.

Next, you must formally end the W-2 employment relationship by processing any final wages and benefits and providing a termination letter.

Once you’ve closed the employment relationship, create a new contractor agreement that clearly outlines the scope of work, payment terms, and expectations for independence. Then, adjust the payment process to reflect their contractor status.

Save time on W-2s, 1099s, and monthly close with Ramp

Classifying workers and meeting W-2 and 1099 deadlines are only one aspect of staying compliant. Accurate recordkeeping and efficient accounting processes are just as important.

Ramp’s accounting automation software helps you maintain accuracy year-round so tax season and payroll reporting run smoothly. Automatically collect receipts, categorize expenses consistently, and sync your records in real time to your accounting software.

Our automation learns from your past transactions to suggest the right categories, helping you reduce manual data entry, prevent errors, and speed up your monthly close. Spend less time on repetitive bookkeeping tasks and more time on strategic planning, knowing your data is accurate, secure, and always audit-ready.

Ready to get started? Try an interactive demo and see for yourself how Ramp can help you manage payments for your contingent workforce.