The W-2 (Wage and Tax Statement) is the form you file for employees. If someone works for your business as a W-2 employee, you're required to:

Withhold federal income tax from their wages Withhold the employee's share of Social Security (6.2%) and Medicare (1.45%) taxes Pay the employer's matching share of those same FICA taxes Pay federal unemployment tax (FUTA) on their wages Report all of this to the IRS quarterly on Form 941 Furnish the employee with their W-2 by January 31 of the following year File copies with the Social Security Administration by the same deadline The W-2 also captures non-cash compensation, certain benefits, and any other reportable income the employee received from you during the year.

Here's the bottom line on the W-2: it reflects an employment relationship in which you bear a significant portion of the tax burden. The employer match on Social Security and Medicare alone adds up to 7.65% of wages — on top of what you're paying the worker. That's not a trivial cost, which is why some business owners try to avoid it by calling people contractors instead. But that calculation only works if the classification is legitimate.

The Form 1099-NEC (Nonemployee Compensation) replaced Box 7 of the old Form 1099-MISC starting in 2020. You file a 1099-NEC when you've paid an independent contractor, freelancer, or other non-employee $600 or more during the calendar year for services rendered to your trade or business.

With a 1099-NEC, you are not withholding taxes. You're simply reporting to the IRS what you paid that person. The contractor is responsible for their own income tax, plus self-employment tax (which covers both the employee and employer portions of Social Security and Medicare — a combined 15.3% on net earnings up to the wage base).

The 1099-NEC deadline is January 31 for both the recipient copy and the IRS copy. File late, and you're looking at per-form penalties starting at $60 and rising to $330 or more, depending on how late and whether the failure was intentional.

A few nuances to keep in mind:

Payments made via credit card or third-party payment networks (PayPal, Stripe, Venmo for Business) are reported by the payment processor on a Form 1099-K, not by you on a 1099- NEC. You don't need to send a 1099-NEC for contractor payments you made through these platforms. The threshold for 1099-K reporting changed multiple times; for the 2025 tax year, Congress restored the old $20,000/200-transaction threshold via the One Big Beautiful Bill Act. Payments to corporations (C-corps and S-corps) generally don't require a 1099-NEC — with exceptions for medical and legal services. If you paid a contractor with a mix of payment methods — some via PayPal, some by check — only the check portion needs a 1099-NEC.

Issuing a 1099-NEC to someone who should have been classified as an employee is not just a paperwork mix-up. It signals a potential misclassification — and if the IRS or DOL investigates, they'll look at the actual working relationship, not just the tax form you filed.

The consequences of employee misclassification can include:

Back payroll taxes. The IRS can assess the unpaid employer share of FICA taxes for up to three years back (longer if fraud is involved). If the worker can't pay their share, you may be responsible for the full amount.

Interest and penalties. On top of the back taxes, there are failure-to-deposit penalties, failure- to-withhold penalties, and interest that compounds over time.

State-level liability. Misclassified workers may be entitled to workers' compensation benefits, unemployment insurance, and state-mandated benefits they never received. States can pursue employers independently of the IRS.

Worker claims. A misclassified worker who later files for unemployment and gets denied — because they were classified as a contractor — may file a claim with the state labor department. This opens an audit of your entire workforce classification.

There's also a flip-side risk: if you've been issuing W-2s to workers who should genuinely be classified as contractors (perhaps because you were being overcautious), you've been overpaying payroll taxes and potentially running an unnecessarily complex payroll system. Classification should reflect the actual nature of the relationship.

Yes — though this is uncommon for most small businesses. It happens when the same person performs two distinct types of work for you: one as an employee (covered by a W-2) and one as a genuinely independent contractor in a completely separate capacity. The IRS permits this, but you need to be able to clearly document that the contractor work was truly separate from the employment relationship. This arrangement invites scrutiny and is best handled with professional guidance.

The 1099-NEC is the most common form for small businesses paying contractors, but it's not the only 1099 you might need to file:

1099-MISC: Still used for rent, royalties, prizes, and certain other income payments of $600 or more to non-employees. 1099-INT: For interest income of $10 or more paid to individuals. 1099-DIV: For dividends paid to shareholders. 1099-K: Filed by payment processors for business transactions above the applicable threshold. For most solopreneurs paying freelancers and service providers, the 1099-NEC is the primary form to know.

As the calendar year winds down, here's how to make sure your 1099 filing goes smoothly:

1. Pull your contractor payment records. Total up payments by payee for the year. 2. Identify who crosses the $600 threshold. Anyone you paid $600 or more for services — by check, ACH, or other direct payment — needs a 1099-NEC. 3. Confirm you have a W-9 on file. If you don't, contact the contractor now and request one. 4. Verify entity type. Remember, most payments to corporations don't require a 1099-NEC. 5. Use payroll or accounting software. Most major platforms (QuickBooks, Gusto, Wave) will generate 1099s automatically if your records are clean.

6. File and furnish by January 31. Both the contractor copy and the IRS copy are due the same day.

The difference between a 1099-NEC and a W-2 isn't just administrative. It's the line between an independent business owner and an employee under the law — with all the tax obligations, legal protections, and financial consequences that come with that distinction. File the right form for the right people, keep your records clean, and don't let the deadline sneak up on you.

Your filing approach may also depend on what state you're operating in — and some states have rules that go well beyond federal law.

The form follows the classification analysis. For the contractor path, follow the first-hire checklist; for state wrinkles like the ABC test, see state contractor laws.