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1099 & W-2 employee payroll and tax reporting

Understanding the risks of misclassification can help protect you from financial penalties.

March 4, 2022

If you hire a payroll provider or accountant to handle paying and classifying full-time employees or freelancers, and they misclassify them, saying “oops” will not save you in a court of law. Understanding the risks of misclassification can help protect you from financial penalties not limited to back-taxes, interest, or other charges.

Using a freelance management system can virtually eliminate risks due to human error or lack of understanding around payroll tax reporting. Worksome’s classification tool, Worksome Classify, mitigates risk by improving the process and indemnifying misclassification cases.

No one wants exposure to litigation. So, let’s map out some basics to ensure it doesn’t happen to you.

  • There are various categories of self-employed workers, each with its responsibilities. The rundown of the most commonly used terms for 1099 recipients are freelancer, independent contractor, consultant, gig worker, contingent worker, and remote contributor. In this article, we will be interchanging these umbrella terms.

Understanding IRS tax documents: The difference between
W-2 and Form 1099

The primary distinction between a W-2 (Wage and Tax Statement) and Form 1099 is that a W-2 worker is an employee on the payroll. By contrast, a 1099 recipient is a non-employee independent contractor. Both tax forms show the amount of money paid out by the business within each tax year.

There are many types of 1099’s, but three of the most common for freelancers are the 1099-NEC, 1099-MISC, and 1099-K.

Who Gets a Form 1099-NEC?

Any freelancer who earns at least $600 from a company that does not consider them an employee must obtain form 1099-NEC (non-employee compensation). Businesses do not have to file a Form 1099-NEC for independent professionals registered as a C-corporation or S-corporation.

What is Form 1099-MISC?

Miscellaneous revenue that does not fit into any other 1099 category gets reported on Form 1099-MISC. You would file a 1099-MISC form for each person to whom you have paid at least $10 in royalties or broker payments, at least $600 in rents, prizes, awards, or other miscellaneous income payments.

How is Form 1099-K used?

You will issue the 1099-K Payment Card and Third-Party Network Transaction form if you process credit cards, debit cards, or prepaid cards to pay money to your freelancers. Companies that operate gig platforms, for example, and pay their workers after processing third-party transactions would issue this type of 1099.  

If you are still using paper tax documents, after completing all your 1099’s for the year, you must complete Form 1096. This tax form contains a summary of all the 1099s you created and is due to the IRS by January 31. You don’t need to file form 1096 if you file 1099s electronically.

How does an independent contractor receive Form 1099?

First, the independent contractor fills out Form W-9 and returns it to you, the employer.

The employer uses form W-9 to determine whether a worker has a legal Taxpayer Identification Number (TIN). The TIN is interchangeable with an Employer Identification Number (EIN) or Social Security number (SSN). Form 1099-NEC (or another 1099 variation) is issued back to the contractor after paying $600 or more to them in a calendar year.

Are you hiring a full-time or part-time payroll type of worker?

Form W-4 is an Internal Revenue Service tax form completed by an employee to indicate their tax situation to the employer. The W-4 form tells the entity the correct amount of federal tax to withhold from an employee's paycheck.

How does a payroll employee receive a W-2?

Businesses can appropriately process payroll after knowing how much their staff members have elected to withhold. Full-time and part-time employees should get their W-2 by mail no later than January 31 of the following calendar year. Employees who receive a W-2 get a summary of their earned salaries for the calendar year, as well as any taxes withheld or deductions made for things like retirement contributions.

Understand the difference before you hire: W-2 vs. 1099 workers

As an employer, you invest in training employees and, as a result, have more influence, but at the cost of greater personal investment. Although independent consultants receive fewer incentives in exchange for job independence, they have more overall freedom than their W-2 counterparts.

It takes more time and money to source full-time employees, whereas
the contingent workforce is easily assembled and fiscally efficient.
The complexity of labor classification contributes to the lengthy hiring
and project completion process. Therefore, businesses can significantly reduce expenses by lowering complexity and enhancing speed using
a sophisticated classification recommendation tool like Worksome Classify.

For more information, read “Legal Worker Classification: Employee vs. Contractor.”

Accurate payroll and tax reporting

Worksome enables you to document work performed and the contracts signed, manage payments, duration of employment, and other key tax-determining factors seamlessly integrated into your business. While certain characteristics may suggest one classification, others may offer a different one, defining how you pay taxes.

According to the IRS, employers should examine their working relationships regularly and analyze and document each of these factors. At Worksome, we help companies compliantly identify, classify, engage, and payroll - every tax lawyer & accountant’s dream product.

Sourcing 1099 employees for specific, high skilled tasks

Correctly classifying the growing remote workforce gives you the unique ability to hire the best talent worldwide. Contractors are often well-trained in their profession and can jump right in with little or no training. Rather than questioning whether or not to work with 1099 “employees,” consider how to do it compliantly.

We understand that accountants, HR managers, and attorneys understand the complexities of worker classification, and we can make your job easier by providing tools like Worksome Classify. Our single platform will help give you confidence in determining correct worker classification recommendations as you hire more freelance and remote teams.  

A scalable growth solution for saving money on taxes

Statistica notes that “79% of executives expect that contingent and freelance workers will substantially replace full-time employees in the coming years.” Saving money in this changing economy will be necessary while accommodating the W-2-workforce’s transition into remote work while also tapping into the current freelancer economy.

Worksome Classify can recommend accurate worker classification for legal payroll and tax reporting, assisting you in hiring, retaining, and paying non-staff and employees confidently, compliantly, and across borders.

This article is not legal advice. Please consult a tax attorney or accountant for legal guidance and visit the IRS website for more information about tax documents.

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