Although both of these forms are called information returns, they serve different functions.
Employers use Form W-2, Wage and Tax Statement to:
- Report wages, tips, and other compensation paid to an employee.
- Report the employee's income and social security taxes withheld and other information.
- Report wage and withholding information to the employee and the Social Security Administration. The Social Security Administration shares the information with the Internal Revenue Service.
Payers use Form 1099-MISC, Miscellaneous Income to:
- Report payments made in the course of a trade or business to a person who's not an employee or to an unincorporated business.
- Report payments of $10 or more in gross royalties or $600 or more in rents or compensation. Report payment information to the IRS and the person or business that received the payment.
The determination can be complex and depends on the facts and circumstances of each case. The determination is based on whether the person for whom the services are performed has the right to control how the worker performs the services. It's not based merely on how the worker is paid, how often the worker is paid, or whether the work is part-time or full-time.
There are three basic categories of factors that are relevant to determining a worker's classification:
- Behavioral control (whether there's a right to direct or control how the worker does the work),
- Financial control (whether there's a right to direct or control the business part of the work), and
- Relationship of the parties (how the business and worker perceive the relationship).
For more information on employer-employee relationships, refer to Publication 15, (Circular E), Employer's Tax Guide and Publication 15-A, Employer's Supplemental Tax Guide. Also, refer to Publication 1779, Independent Contractor or Employee.
If you would like the IRS to determine whether services are performed as an employee or independent contractor, you may submit Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
Generally, if you're an independent contractor you're considered self-employed and should report your income (nonemployee compensation) on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship) or Schedule C-EZ (Form 1040, Net Profit From Business (Sole Proprietorship). Most self-employed individuals will need to pay self-employment tax (comprised of social security and Medicare taxes) if their income (net earnings from self-employment) is $400 or more. Use Schedule SE (Form 1040), Self-Employment Tax to figure the tax due.
Generally, there's no tax withholding on income you receive as a self-employed individual as long as you provide your taxpayer identification number (TIN) to the payer. However, you may be subject to the requirement to make quarterly estimated tax payments. If you don't make timely estimated tax payments, the IRS may assess a penalty for an underpayment of estimated tax. For more information on estimated tax, refer to Publication 505, Tax Withholding and Estimated Tax. Unlike independent contractors, employees generally pay income tax and their share of social security and Medicare taxes through payroll deductions (withholding).