The main difference between Form W-2 and Form 1099-NEC lies in who receives them and how they report income. Here’s a breakdown:
Form W-2 (Wage and Tax Statement)
- Purpose: Reports wages paid to employees and the taxes withheld from their paychecks.
- Who Receives It: Employees (full-time, part-time, or temporary) of a business.
- Key Features:
- Reports gross wages, federal income tax withheld, Social Security, and Medicare taxes.
- Includes deductions for benefits like retirement plans or health insurance.
- Indicates employer contributions to Social Security and Medicare taxes.
- Tax Obligation: Employers are responsible for withholding and remitting payroll taxes on behalf of employees.
Form 1099-NEC (Nonemployee Compensation)
- Purpose: Reports payments of $600 or more to non-employees, typically independent contractors or freelancers.
- Who Receives It: Independent contractors, self-employed individuals, or sole proprietors who provided services.
- Key Features:
- Reports the total compensation paid but does not include tax withholdings.
- The contractor is responsible for paying their own taxes, including self-employment tax (Social Security and Medicare) and estimated income taxes.
- Tax Obligation: Employers do not withhold taxes; recipients must calculate and pay their own.
Key Differences
| Feature | Form W-2 | Form 1099-NEC |
|---|---|---|
| Recipient | Employee | Independent contractor |
| Tax Withholding | Taxes withheld by employer | No taxes withheld |
| Social Security/Medicare | Employer and employee contributions | Self-employed pays both shares |
| Reporting Threshold | No minimum wage threshold | Payments of $600 or more |
| Benefits | May include deductions for benefits | No benefits provided |
How to Decide Which Form to Use
- Issue a Form W-2 if the individual is an employee (you control how, when, and where they work).
- Issue a Form 1099-NEC if the individual is a contractor (they are self-employed and control their own work).
