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What's the difference between a W2 and a 1099?

With tax season quickly approaching, many people in California are starting to gather documents and prepare for filing. For employees who are receiving a refund, early filing can mean an earlier refund, so many people plan to file as soon as the Internal Revenue Service starts accepting returns. Understanding the various types of documents you receive regarding taxes is important, making now a good time to review the difference between W2s and 1099s.

Both of these are forms that companies provide to workers to document how much the company paid the person throughout the year. The forms are also routed to the Social Security Administration and might also be sent to the IRS. But each form is used for a different type of work.

A W2 form is used for someone who is a traditional full-time or part-time employee. That means that the person works for the employer and the employer handles withholding taxes. A W2 form includes the amount of salary, wages, tips and other income you made through the employer in a year. It also lists the amount of taxes that were withheld from your paycheck for Medicare, Social Security, and federal taxes. W2 forms might also include information about state and local taxes paid and pretax deductions for retirement and other accounts.

A 1099, on the other hand, is a form that is provided to contractors. Contractors work with rather than for a company and they are paid based on a contract agreement or invoice procedure. The employer doesn't handle taxes for the contractor -- he or she must pay all taxes. As such, a 1099 does not include information about tax withholdings.

In recent posts, we've touched on some reasons employers are turning to contract workers, but it's important to note that you aren't a contractor simply because an employer says you are. If you are being paid as a contractor, but the employer has a lot of control over your work, you might be a W2 employee. Speaking with an attorney about your situation can help you understand whether you are being paid correctly or whether you should have access to additional benefits.

Source: The Motley Fool, "1099 vs W2: Which Is Preferable for Employers and Employees?," Selena Maranjian, accessed Dec. 24, 2015