Form W2 Vs. Form 1099

Amounts paid are reported on forms W2 and 1099.

Businesses are required to report the amounts paid to employees and subcontractors on forms W2 and 1099. An employee gets a W2, and a subcontractor receives a 1099.

Employee

An employee is paid by the business to do certain tasks. The employer requires the employee to be on the job for specified days and times. Often the employee offers benefits such as insurance or vacation and sick leave time.

Subcontractor

A subcontractor or independent contractor is a self-employed person who provides services for a business. According to the IRS, the business hiring an independent contractor has the "right to control or direct only the result of the work and not the means and methods of accomplishing the result."

Difference

The primary difference between the two is that an employer has more control over the time of the employee. An independent contractor is running her own business and decides when she will work on a particular project. An employer can require the employee to be at work at specified times regardless of the work load.

When

Employers are required to furnish forms W2 to their employees by January 31. Businesses that pay independent contractors $600 or more annually are required to furnish Form 1099-MISC by January 31.
Businesses are required to send reports of information forms W2 and 1099-MISC to the IRS by February 28.

Warning

In an effort to save employment taxes, some businesses will classify employees as independent contractors. But unless the person has other clients for whom he performs similar services, he is an employee and not a subcontractor. It can cost the business much more than the employment taxes if the IRS discovers the subterfuge. Often the employee will welcome the extra take home pay until it's time to file their taxes, and they discover that they are responsible for the self-employment and federal and state and local taxes that were not deducted from their pay.

References

• IRS Definition of Employee
• IRS Definition of Independent Contractor
• IRS Employment Taxes