The difference between Form W-2 and Forms 1099-MISC or 1099-NEC lies primarily in the nature of the employment relationship and the type of income being reported.
- Form W-2 is used by employers to report wages, tips, and other compensation paid to an employee. It also reports the employee's income and social security taxes withheld along with other information. Employers are required to furnish Form W-2 to the employee and the Social Security Administration, which then shares the information with the Internal Revenue Service (IRS). This form is indicative of an employer-employee relationship where the employer has control over what will be done and how it will be done by the worker, even if the employee has freedom of action.
- Form 1099-MISC is used to report various types of payments made in the course of a trade or business to individuals who are not employees. This includes payments of at least $10 in royalties or at least $600 in rents, prizes and awards, other income payments, medical and health care payments, crop insurance proceeds, gross proceeds paid to an attorney, and more. It is used for reporting payments made to nonemployees, such as independent contractors or freelancers, for services performed.
- Form 1099-NEC is specifically used to report nonemployee compensation of $600 or more for services performed by someone who is not an employee, including parts and materials, and payments to an attorney. This form is indicative of a non-employer-employee relationship, where the payer is treating the payee as a self-employed worker or independent contractor. This distinction is crucial for tax purposes, as it affects how the worker reports income and pays taxes, including self-employment tax.
In essence, the key difference between these forms is the nature of the relationship between the payer and the payee and the type of payments being reported. Form W-2 is used for employees from whom income and employment taxes are withheld by the employer, while Forms 1099-MISC and 1099-NEC are used for nonemployees, such as independent contractors, to whom the payer does not withhold income and employment taxes.
Sources:
IRS FAQ
IRS FAQ
Lawyers, Settlements, and Forms 1099-MISC and 1099-NEC
Publication 334 (2023)
Publication 15 (2024)
Instructions for Forms 1099-MISC and 1099-NEC (01/2024)
Publication 583 (1/2021)
