(Tax Year 2024 – To Be Filed in 2025)
Overview
Not everyone working for a business receives the same tax form. The IRS requires employers to issue Form W-2 to employees and Form 1099-NEC to independent contractors. The distinction between the two classifications matters significantly for tax reporting and compliance.
Form W-2 is issued under Internal Revenue Code § 6051, while independent contractor payments fall under IRC § 6041.
Misclassification of workers can lead to IRS penalties, missed tax payments, and incorrect reporting.
Who Gets a W-2 Form?
A W-2 form is issued to individuals who are classified as employees. Employees typically:
- Work under the control and direction of the employer
- Receive regular paychecks (salary or hourly)
- Have taxes withheld automatically (federal, state, Social Security, Medicare)
- May receive benefits like health insurance or retirement contributions
Under IRC § 6051, employers are required to report all compensation paid and tax withheld from employees on Form W-2.
Who Gets a 1099 Form Instead?
Independent contractors do not receive a W-2. They receive Form 1099-NEC if they were paid $600 or more during the year. Contractors:
- Control how and when the work is done
- Invoice the business for their services
- Do not have taxes withheld (they handle their own tax obligations)
- Are not eligible for employee benefits
Under IRC § 6041, payments to non-employees for services are reported using Form 1099-NEC.
Key Differences: W-2 vs. 1099
| Feature | W-2 Employee | 1099 Independent Contractor |
|---|---|---|
| Tax Form | Form W-2 | Form 1099-NEC |
| Tax Withholding | Yes (Federal, SS, Medicare) | No withholding |
| IRS Code | IRC § 6051 | IRC § 6041 |
| Payroll Taxes Paid By | Shared by employer and worker | Solely by contractor |
| Eligible for Benefits | Usually yes | No |
| Controls Work Schedule | Employer | Contractor |
Example: Sarah vs. Mike
- Sarah works as a graphic designer at a marketing firm. She reports to a manager, works 40 hours a week, and receives a biweekly paycheck. Taxes are withheld.
→ She is an employee and receives Form W-2. - Mike does freelance design for the same firm but works on a per-project basis. He sends monthly invoices and is responsible for his own taxes.
→ He is an independent contractor and receives Form 1099-NEC.
Step-by-Step: How to Know Which Form You Should Receive
- Review Your Work Relationship
- Do you have a manager? Are you on a schedule? You’re likely an employee.
- Are you working independently, setting your own hours? You’re likely a contractor.
- Check Your Pay
- Employees get regular wages with taxes withheld. Contractors are paid gross.
- Confirm With the Payer
- Ask the company which form they’ll issue. Errors should be corrected before tax season.
- If Misclassified
- File Form SS-8 with the IRS to request a determination of your correct status.
- File Taxes Accordingly
- Employees use W-2 data on Form 1040.
- Contractors use 1099 income on Schedule C and pay self-employment tax using Schedule SE.
Conclusion
Only employees receive Form W-2. Independent contractors do not. This distinction determines not only what form you receive but also how your income is taxed and reported to the IRS. If you’re unsure of your status, it’s important to resolve it early to avoid filing errors or penalties.
Call to Action
If you’re confused about whether you should receive a W-2 or a 1099, or if you suspect you’ve been misclassified, it’s best to consult a tax professional. Schedule a meeting with Anshul Goyal, CPA EA FCA, to review your classification and ensure you’re filing your 2024 taxes correctly in 2025.
Top 5 FAQs: W-2 vs. Independent Contractor
Can I receive both a W-2 and a 1099 from the same company?
Yes, if you performed both employee and freelance work separately for the same business.
What happens if I was treated as an independent contractor but should’ve been an employee?
You may have been misclassified. You can file Form SS-8 to request a worker classification determination.
Do contractors have to pay self-employment tax?
Yes. Independent contractors are responsible for paying both the employer and employee portion of Social Security and Medicare taxes.
How do I know if I’m an employee or contractor?
Look at behavioral, financial, and relationship control factors. If the business controls most aspects of your work, you’re likely an employee.
Can I deduct expenses if I receive a W-2?
Generally no, unless you’re a qualified employee under specific exceptions. Independent contractors can deduct eligible business expenses on Schedule C.
About Our CPA
Anshul Goyal, CPA EA FCA is a licensed Certified Public Accountant in the United States and an IRS-authorized Enrolled Agent. He specializes in tax litigation, payroll compliance, and cross-border taxation. Anshul helps U.S. businesses and Indian professionals navigate IRS reporting, classification issues, and complex tax filings.
Schedule a meeting with Anshul by clicking here: https://calendly.com/anshulcpa/
Disclaimer
This article is for informational purposes only and does not constitute legal or tax advice. For personalized tax advice, consult a qualified CPA or Enrolled Agent.