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W-2s vs. 1099s: What Small Business Owners Really Need to Know

  • Writer: Brian R. Schobel, CPA
    Brian R. Schobel, CPA
  • 6 hours ago
  • 2 min read

Hiring help is a big step for your business—but so is choosing whether someone gets a W-2 or a 1099. Understanding the difference helps you avoid penalties and keep tax season stress-free.


W-2 Employees: More Control, More Responsibility

A W-2 worker is an employee. You set their schedule, guide how the work is done, and manage ongoing responsibilities. Because of this control, you must withhold taxes and handle payroll.


Best for: ongoing roles, customer-facing work, or tasks that require oversight.


1099 Contractors: Flexible and Independent

A 1099-NEC worker is an independent contractor. They control how the work is done and provide services for your business—not as part of it. You simply pay their invoice.


Best for: short-term projects, specialized expertise, or work done off-site and independently.


Key Reporting Rules You Should Know

  • Minimum amount to report:

    • 1099-NEC: Required if you pay a contractor $600 or more in a calendar year.

    • W-2: Required for all employees, regardless of amount earned.

  • Filing deadlines:

    • January 31 is the big day for both forms. You must send W-2s to employees and 1099-NECs to contractors and submit copies to the IRS by this date.


How to Choose the Right Classification

  • Level of control: If you direct day-to-day work, the role is likely W-2.

  • Nature of the relationship: Ongoing, essential roles lean toward W-2; project-based or specialized work leans 1099.

  • Avoid misclassification: Penalties can add up fast if a contractor is actually functioning like an employee.


Stay Organized and Reduce Stress

  • Collect worker info (W-9s for contractors, W-4s for employees) early.

  • Keep clear records of payments and hours or deliverables.

  • Review roles yearly—business needs evolve.


Conclusion: When in Doubt, Ask an Expert

Choosing correctly between a W-2 and a 1099 protects your business and keeps tax season simple. If you’re unsure how someone should be classified or reported, ask your accountant for help—a quick check-in now can save headaches and penalties later.



 
 
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