In 2019, Uber got hit with $650 Million in penalties for misclassifying their drivers as independent contractors rather than employees.
Their mistake? Issuing 1099-NEC forms instead of the W-2s: the primary point of distinction between the two types of workers.
The IRS is very clear about these regulatory practices, and if you don’t follow the rules, you could end up paying some hefty fines for noncompliance.
Form 1099-NEC and W-2 forms are quite different. Looking at their textbook purpose, they are fundamentally different in their approach and reporting requirements.
While 1099-NEC is issued to an independent contractor, W-2 forms are issued to employees. Confusing the two, and misclassifying the individuals for one another could be a very expensive mistake your business can make.
Let’s review how this mistake can be avoided and how to comply with the reporting requirements for both forms in the following discussion.
So, let’s get started.
Understanding Form W-2 & Form 1099-NEC
Form W-2 is a Wage and Tax statement, and it is used to report an employee’s wages and taxes. It is issued to the employee and the Social Security Administration.
The employer issues the form reporting information such as the employee’s social security number, income, and the amount of taxes that were withheld from their paycheck.
Form 1099-NEC is a newer addition to the 1099 series, and it stands for Nonemployee Compensation. This form is used to report payments made to contractors and other nonemployee workers. The payer issues the form, reporting information such as the recipient’s name, address, and social security number.
1099-NEC is used for reporting the compensations paid to the independent worker in exchange for their services if the gross payment is $600 or higher.
Who Should File Form W-2?
All employers must file a Form W-2 for each employee to whom they have paid wages, tips, other compensation, and withheld federal income tax. This includes corporations, partnerships, limited liability companies (LLCs), and sole proprietorships.
Who Should File Form 1099-NEC?
Businesses should file a 1099-NEC for any non-employee worker or contractor to whom they have paid $600 or more in a year for services performed as an independent contractor.
The payer is not required to withhold federal income tax from these payments. However, the payer is bound to withhold a part of the payments due to the contractor if the independent contractor fails to furnish accurate TIN and legal name combinations.
Do You Know?: In 2020, the IRS re-introduced 1099-NEC. Prior to this, in order to report nonemployee compensation, businesses were required to file form 1099-MISC. Now, businesses will have to use form 1099-NEC for reporting nonemployee compensation and use 1099-MISC to report other types of payments such as rents, royalties, prizes, and awards.
W-2 Vs 1099-NEC: Know The Difference
When it comes to IRS form filing, there’s always some type of confusion. And it’s understandable. With so many different tax terms and abbreviations, it can be difficult to understand what everything means. This is especially true when two forms seem similar but have different purposes. Such is the case with Form W-2 and Form 1099-NEC.
To help you out, here we have put together the key differences between the two forms.
The Difference Between Form 1099-NEC Vs Form W-2
| Form W-2 | Form 1099-NEC |
| Form W2 is used to report employees’ annual wages and the amount of taxes withheld from their paychecks. | Form 1099-NEC is used to report nonemployee compensation. |
| W2 is used for tax reporting by employers. | 1099-NEC is used for reporting payments issued by businesses to contractors |
| W2 must be filed with the Social Security Administration (SSA) | 1099-NEC does not need to be filed with the SSA. It needs to be filed with the IRS. |
It’s interesting that the main similarity between these two forms is that they are both used for reporting payments issued to workers.
However, it’s important to understand the distinction: Form W-2 is primarily issued to your employees, and Form 1099-NEC is issued to independent contractors.
Classifying your workers, employees or otherwise, correctly, is the key to compliance. Misclassifying either of the two could bring in hefty penalties from the IRS.
What Will Happen If You File The Wrong Form?
It’s possible to issue the wrong form to the IRS. Even the sharpest businesses can make such a mistake. However, within the regulatory sphere, such minor mistakes or errors can have consequences.
If you accidentally use the wrong form, the IRS will send you a notice, asking you to file the forms with the correct information. But this isn’t the case all the time.
When in doubt, you can always contact Tax1099, an IRS-approved e-file provider, for help with any questions about filing your taxes.
Form W-2: When Is It Due?
| Filing Type | Due Date |
| Recipient copy | 31st January 2023 |
| IRS eFile | 31st January 2023 |
| IRS Paper Filing | 31st January 2023 |
Form 1099-NEC: When Is It Due?
| Filing Type | Due Date |
| Recipient copy | 31st January 2023 |
| IRS eFile | 31st January 2023 |
| IRS Paper Filing | 31st January 2023 |
Understand The Difference: Independent Contractor vs Employee
You must have understood that the main confusion arises from the terminology given to these two statuses by the IRS.
So, let us understand the key differences between independent contractors and employees from a legal standpoint.
An independent contractor is a person who provides services to another person or company under an express or implied agreement. The key here is that the independent contractor is not subject to the control or direction of the other party when performing work. They are not considered employees of the company with whom they contract.
An employee, on the other hand, is a person who works for another person or company in return for regular salaries. The key here is that the employer has the right to control or direct how the employee does their work. Employees are also considered part of the company they work for and are subject to its rules and regulations.
An employee also gets various benefits that an independent contractor does not, such as vacation pay, sick pay, and health insurance. Employees also have more legal protections than independent contractors. When it comes to filing a W-2 or 1099 NEC, this factor is the key differentiator.
Understanding the difference between an independent contractor and an employee is important because it can have big implications for your business.
For example, if you misclassify an employee as an independent contractor, you could be liable and labor unions could sue your business for misclassification.
How Tax1099 Can Help You With Form W-2 and Form 1099-NEC Filing?
Tax1099 is a secure eFiling platform that allows you to file your W-2 and 1099-NEC forms conveniently online.
Tax1099 also offers various features that make your eFiling process super easy and seamless.
What Tax1099 Enables For Your 1099 Form Filing Requirements:
- TIN Verification: With Tax1099’s TIN Verification, you can be assured that the taxpayer identification number reported on the forms is accurate. Plus, we provide 100% accurate results within 30 seconds.
- Bulk Filing: If you have to file multiple forms, Tax1099 can help you do it easily. With our bulk filing solutions, you can upload your tax-sensitized data via Excel or any other accounting software such as Quickbooks, Xero, Tipalti, Sage, Bill.com, and more. Tax1099 will take care of the rest.
- API: With our API, you can automate the whole process of collecting W-9 forms from vendors, TIN Verifications, Tax-Exempt Checks, eFiling of 1099s and W-2s, and more.
- USPS Address Validation: Our platform comes with USPS address validation, which helps reduce errors while filing tax returns.
- State Filing: Depending on your state’s requirements, your filing requirements will also change, requiring you to adapt in order to comply. With Tax1099, this becomes easy. We’ll help you file per the state’s requirements, enabling you to report the information accurately and file the forms diligently.
If you’re looking for a reliable and easy-to-use eFiling platform, look no further than Tax1099.
With our bulk filing feature, USPS address validation, state filing compliance, and 24/7 customer support, we’ve got you covered.
Sign up today and schedule a demo to see how we can enable compliance for you.
