With April 18th looming on the horizon many people are beginning the scramble to complete their taxes and come up with any additional money they owe the state and federal government, unless they are lucky enough to be receiving a refund. As always, there is often a great deal of uncertainty about the rules and regulations that govern our taxation system in this country. One area where workers and employers can become confused is the difference between the W-2 and the 1099 earned income statements.

W-2 vs 1099 Explained

  • An employee with a W-2 is paid on an hourly or salaried basis, while an employee with a 1099 is paid based on a contract that has a defined end, although the duration of employment can last anywhere from several weeks to years. Typically, 1099'd employees are hired to work on a specific project or to provide support during a W-2'd employees' leave of absence.

The W-2 form is used to document the income earned by the employee.

  • This earnings statement includes wages, tips and any commissions, as well as the total amounts of state, federal and social security taxes that have been withheld by the employer during the year's employment.

Similarly, the 1099 form is used to detail the amount of income that is earned by independent contractors but it does not include any withholding of federal, state or social security taxes.

  • The 1099 form is used to record the pay of freelance or temporary employees and it is the expectation of the state and federal government that the individual will pay the appropriate taxes based on the fee schedule established annually by the Internal Revenue Service and the state tax commission.

  • These employees can deduct work-related expenses, such as supplies or materials and other expenses associated with fulfilling their work. Additionally, the 1099 form is used to record other income such as, prize money or royalties.

Additional Information for employees:

  • The Internal Revenue Service provides a withholding calculator to calculate your estimated taxes based on your salary and deductions.

  • In addition, there are a number of tax calculators available online to help individuals determine a.) if they are having the appropriate amount withheld by their employer and b.) how much they should anticipate paying if they are independent contractors.

Additional information for employers:

  • For employers, determining the classification status of employees and clearly communicating this status is important for maintaining understanding between the parties and clarifying expectation in terms of taxation. Frequently, companies hire workers on a contractual basis for help with specific projects or to fill in during leaves of absence. For clarification, an employee that has a 1099 generally has an end date associated with their employment. This end date may be the completion of a project or the return date of an absent employee but there will be a set expectation that the contract will come to an end at a given point.

  • Understanding the difference in tax payment accountability between a full time (W-2) and contract (1099) employee is important because the responsibility for withholding and paying taxes is different but the individual responsibility for payment is the same. That is, although the employee with a W-2 has pre-determined and self-declared percentages of each paycheck automatically withheld by the employer who then sends these to the state and federal government from each paycheck, if that amount is too small the W-2 employee will still have to pay the difference. The employee with a 1099 is entirely responsible for determining and withholding the appropriate amount from their pay, so that they can pay the state and federal government what they owe. Utilizing the withholding calculators provided by the IRS and other tax service sites is a crucial check to make certain that you are on target in your tax responsibilities.