1099 vs W-2 – What’s the Difference in 2025?

As a small business owner, understanding the difference between a 1099 contractor and a W-2 employee is essential for compliance, tax reporting, and budgeting. Misclassification can lead to serious penalties – so in 2025, it’s more important than ever to know where the line is drawn.

Let’s break it down.

1099 vs W-2: What Do These Forms Mean?

• 1099-NEC: Used to report non-employee compensation – payments made to independent contractors.

• W-2: Used to report employee wages, taxes withheld, and benefits.

The form you issue isn’t just a tax document – it reflects how the worker is treated under the law.

✅ W-2 Employees

W-2 workers are your employees. You control what, how, and when they do their work. You’re responsible for:

• Withholding federal and state income taxes

• Paying employer portions of Social Security and Medicare (FICA)

• Unemployment insurance and workers' comp (where required)

• Providing a W-2 by January 31, 2026

📌 Use W-2 if:

• You supervise their schedule

• You provide the tools/equipment

• The work is ongoing or integral to your business

✅ 1099 Contractors

1099 contractors are self-employed. They control how and when the work gets done, and they:

• Handle their own taxes (no withholdings from you)

• Pay self-employment tax (Social Security + Medicare)

• Invoice you for services

• Receive a 1099-NEC if paid $600+ during the year

📌 Use 1099 if:

• The contractor sets their own hours

• They use their own tools

• You’re contracting a project or temporary service

How to Decide?

Follow the Control Test. The IRS focuses on three key areas of control:

1. Behavioral – Do you control how the work is done?

2. Financial – Who controls the business aspects (tools, expenses, profit/loss)?

3. Relationship – Is there a written contract? Are benefits provided?

If you're unsure, the safer route is to treat the worker as an employee – or request a determination from the IRS (Form SS-8).

🆕 What’s New or Important in 2025?

1. E-filing mandate expanded:
   If your business files 10+ information returns, you're now required to file 1099s and W-2s electronically via the IRS and SSA portals.

2. Worker classification enforcement:
   The Department of Labor is increasing audits. Be ready to prove why a contractor isn’t an employee.

3. State rules vary:
   Some states (like California) follow stricter ABC tests under laws like AB5. Always review local guidance.

How We Can Help

Our bookkeeping team helps small business owners:

• Track contractor vs. employee payments accurately in QuickBooks

• Prepare 1099s and reconcile records at year-end

• Clean up payroll accounts to ensure W-2s are complete

• Stay compliant with changing IRS and state rules
  

💬 Need help organizing your 2025 books before tax season? Let’s talk.