What is the difference between a W-2 and 1099?
A W-2 reports wages paid to an employee. A 1099-NEC reports payments made to an independent contractor. The difference comes down to the working relationship between you and the person you’re paying, and each form carries different obligations for your business.
When someone is your employee, you issue a W-2 at year end. You’re responsible for withholding federal and state income taxes, Social Security tax, and Medicare tax from their paychecks. You also pay the employer portion of Social Security and Medicare, plus federal and state unemployment taxes. Employees may be eligible for benefits, workers’ comp coverage, and protections under labor laws. Getting payroll system setup right from the start makes these obligations manageable rather than overwhelming.
When you hire an independent contractor, you issue a 1099-NEC if you paid them $600 or more during the year. You don’t withhold taxes. The contractor handles their own tax obligations, including self-employment tax. You’re not on the hook for benefits, unemployment insurance, or workers’ comp for that person.
The IRS uses several factors to determine whether someone is an employee or contractor. The big ones are behavioral control, financial control, and the type of relationship. Do you control how and when they work? Do they have their own business expenses and opportunity for profit or loss? Is there a contract, are benefits provided, is the work a key part of your regular business?
If you control the manner and means of the work, that person is likely an employee regardless of what you call them. A contractor who shows up at your office every day, uses your equipment, follows your schedule, and answers to your manager isn’t really a contractor. The title doesn’t matter. The substance of the relationship does.
Misclassification is expensive. If the IRS or New Mexico Department of Workforce Solutions determines you’ve been treating employees as contractors, you could owe back taxes, penalties, and interest. You may also face liability for unpaid overtime, missed benefits, and other employment law violations. This is one of the more common issues virtual bookkeepers in New Mexico help small businesses sort out.
Both forms are due to recipients by January 31. W-2s get filed with the Social Security Administration. 1099-NECs get filed with the IRS. Late or incorrect filings result in penalties that stack up quickly if you’re dealing with multiple workers.
If you’re unsure how to classify someone, figure it out before you start paying them. Fixing a classification problem after a year or two of payments is far more expensive than getting it right from day one.
Santa Fe's Small Business Bookkeeper
The Next Step:
A Quick Conversation
Tell us about your business and what you're dealing with. We'll listen, ask a few questions, and give you a straightforward quote.
More Questions
What expenses can Airbnb hosts deduct?
Airbnb hosts can deduct operating costs, platform fees, supplies, and a portion of property expenses like mortgage interest and taxes. How much you deduct depends on whether the property is a dedicated rental or your primary residence.
Read answerHow do I track supplies and amenities for vacation rentals?
Track vacation rental supplies by creating specific expense categories in your accounting software and coding every purchase to the correct property. The goal is understanding your true cost per guest stay, not just having receipts for tax time.
Read answerHow far back can a bookkeeper reconcile my accounts?
Most bookkeepers can reconcile accounts going back 3 to 7 years, depending on bank statement availability and your documentation. The real question is whether going that far back makes sense for your situation.
Read answerHow do I track material costs by job in QuickBooks?
Enable project tracking in QuickBooks and assign every material purchase to the correct job when you enter it. The setup takes minutes. The discipline of coding every purchase consistently is what actually makes it work.
Read answerWhat is the best bookkeeping software for contractors?
For most small to mid-size contractors, QuickBooks Online is the standard. It handles job costing, integrates with common tools, and every accountant knows how to work with it. The key is setting it up correctly for contractor needs.
Read answerCan a bookkeeper fix years of disorganized records?
Yes, a skilled bookkeeper can reconstruct and organize financial records going back several years. Bank statements provide the foundation, and missing documentation can usually be worked around. The longer you wait, the harder it becomes.
Read answer
