The Difference Between a 1099 and a W-2

There are two forms of income statement which most people who earn money in the United States are familiar with. These would be the W-2 and the 1099, and are often confused with each other. There are variations of both forms, which are used for similar purposes. Here is the definition of each and how they are different.

Both the1099 tax form and the W-2 Earnings Statement are tax filing forms used by the United States Internal Revenue Service for reporting taxable income. The 1099 tax form is used to report monetary distributions. The W-2 is used to report wages paid to employees plus the taxes paid for those wages. There are variations in the uses of these forms as we will see next.

The IRS form 1099 is used in place of form W-2 when a company or agency needs to report payments to an individual who is not an employee. A 1099 tax form is also used in showing multiple distributions to individuals, such as a company which pays multiple freelance contractors. This is similar to multiple W-2's showing payments to employees of a business or organization. An example of this would be a nonprofit organization or a factory.

As of 2009 there are 18 variations of a 1099 tax form. The most common types used are the 1099 MISC (for miscellaneous income), 1099 INT (for interest payments) and 1099 R (for retirement income). Fortunately there is only one type of W-2. For people who have retired this can be confusing as now they must know which 1099 they need, where before all they needed was a single W-2 from each employer they work for. For help with this the IRS has a page with information and a list of publications. That link will be listed in the resource section.

So who uses which form? An example of who would use a 1099 form would be a business which uses independent contractors. Another example of use would be payments from a pension or retirement plan. Casinos and racetracks also send 1099 forms to winners. If you filled out a time sheet for a company, you are an employee and they should hand you a W-2. If you need to pay FICA taxes or report income to the Social Security Administration you would use a W-2 unless you own the business then you would file directly with the state of incorporation. If you work for a staffing agency, the agency will owe you a W-2 not a 1099.

W-2's and 1099's are similar in use, and even look similar on paper. The main difference between the two is the income dispersion method. Make sure you use the correct form for your situation as many companies may look at you as an independent worker to save on taxes.