W-2 vs W-9: Understand the Key Differences

If you are a U.S. based business hiring and paying an individual, you must first decide the classification of your worker. This isn’t merely a formality, but a basis of what forms they’d fill and how much of their tax you will withhold.

W-2 and W-9 are the two types of forms that apply to different categories of workers. If you hire a worker as an employee, you must follow employment tax rules, issue W-2 form to employees at the year end and report withheld taxes.

If you hire them as an independent contractor or vendor, you must request a completed W-9 form and use it to file Form 1099 at the end of year.

Misclassification of your workers and payments can lead to hefty IRS penalties and potential IRS notices. Thus, payers must know which form to fill out for what type of workers to comply with the IRS regulations.

When to issue W-2 or W-9 form? What’s the difference between employee and contractor?

In this comparison of W-2 vs W-9, we’ll talk about the difference between W-2 and W-9 form with a side-by-side comparison and when should payer collect the two forms.

Who is considered a “Payer”?

A payer is a business or an individual that makes payments to employees, contractors or award recipients.

A payer is responsible for:

• Deciding the worker’s classification
• Collecting W-9 from the contractors
• Filing W-2s or Form 1099 with IRS
• Withholding taxes accordingly

Understanding Form W-2 and W-9

Payers need to fill out the correct tax forms to maintain tax compliance and avoid hefty tax penalties. Since W-2 and W-9 forms are filled out for different types of workers and different purposes, misclassification between them is a common mistake.

The payer must correctly classify the worker as the employer or an independent contractor or freelancer to decide whether W-2 or W-9 needs to be sent to the working individual.

What is a W-2?

Form W-2 (Wage and Tax Statement) is an IRS tax form that details the employer annual compensation and amount of tax withheld past year. The form also lists various employee benefits as well as the withholding of Social Security and Medicare taxes.

Every business owner should file a W-2 form detailing the amount of taxes they withhold for each employee. Employers use this data to file the state and federal taxes.

A copy of completed W-2 form must be sent to the employee as well as the IRS to maintain tax compliance.

When should the payer use Form W-2?

A payer should use W-2 form if they are hiring an employee on payroll. To classify a worker as an employee, you can ask a few questions:

• Does the payee get employee benefits such as health insurance, paid time off and retirement plans?
• Do they have fixed working arrangements?
• Does the payee receive a fixed hourly or monthly salary?

If the answer to all these questions is ‘Yes’, the payee is considered as an employee on the payroll. Thus, the payer reports the total wages and amount of taxes withheld from the income in form W-2.

If you want to classify your workers, here’s a quick quiz to find out.

How to file a W-2 form?

You can file a W-2 form electronically with SSA or send a paper form via post or mail.

Below, we’ve shared the quick step by step process to fill a W-2 form:

• Fill the boxes with information such as employee’s SSN, employer identification number (EIN), employer’s name and address, and control number.
• Next, fill the boxes for reporting certain tax types such as wages (box 1), federal income tax withheld (box 2), social security wages (box 3), and Medicare tax withheld (box 5).
• You can file the completed W-2 form electronically with Social Security Administration (SSA) or send it via post or mail. The filled copy must also be sent to employee.

What is Form W-9?

A W-9 form (Request for taxpayer identification number and certification) is a document that payers send to independent contractors and freelancers. Though it is a tax form for the independent workers, it certifies the payee’s TIN.

Businesses use the W-9 information to prepare for returns like Form 1099-NEC or 1099-MISC.

However, W-9 does not need any tax withholding since the contractors and freelancers are required to pay their own taxes until they are subject to tax withholding.

If the payee fails to provide a correct TIN, the payer must withhold 24% from the paid invoices.

A W-9 form includes the information such as:

• Name of the individual/entity
• Business name (if applicable)
• Federal tax classification of the entity/individual
• Exemptions
• Address, city, state, and ZIP code
• Social security number (SSN) or Employer identification number (EIN)

When to Collect W-9 From Vendor?

A W-9 is filled by the person who is being paid, but not on payroll. It could be a contractor, vendor, or prize winner. This is not a tax form but a certificate for requesting the taxpayer’s identification number.

Unlike employees, the contractors need to declare their income and pay their own self-employment taxes. Businesses use the information in form W-9 to generate 1099-form and submit it to IRS.

W-2 vs W-9: Key Differences

Along with the workers classification, it is important to figure out the significant differences between W-2 and W-9 form. Let’s look at these points of difference:

Thus, W-2 and W-9 have different purposes as well as different guidelines to submit to the IRS. With the right guidance, you won’t have a hard time differentiating between who to send W-2 and W-9 forms.

What to do if Payer does not receive from W-9 from Payee?

The short answer to this question is Backup Withholding!

If the payer does not receive a W-9 from the payee, then the payer should immediately report a 24% backup withhold tax on any payments made to the payee.

Although there are up to three solicitations to request a payee’s TIN but if the payee fails to submit the request, the payer should not delay the Form 1099 filing. The payer should fill in Form 1099 with a notation that payee has failed to submit W-9 form.

Based on this notation, the payer reports the amount withheld on form 1099. Remember that the refusal to submit W-9 form from payee does not abstain the payer to fill their 1099 form with the IRS.

Frequently Asked Questions:

Should the payer always collect a W-9 before paying a contractor?

Yes. Payer should always collect W-9 before paying a contractor. This is important for filing the accurate 1099 form and avoid penalties.

Can the same person receive both a W-2 and a 1099?

Yes. A same person can receive both W-2 and 1099 only if they are paid employee in one company and work as an independent contractor with another company.

What if the payer is unsure about classification?

If a payer is unsure about the classification, they must go through the classification rules outlined by IRS. It is also recommended to consult a tax professional like Tax1099.

Is the W-9 sent to the IRS?

No, W-9 need not to be sent to IRS. It is for the payer’s record and they should use the W-9 information to fill the form 1099.

How long should the payer keep W-9s and W-2s?

A payer should keep W-9 as well as W-2 forms for at least four years. The auditors might ask for a form with a period of at least four years during the auditing period.

What if the TIN is wrong on the W-9?

You must validate the TIN if it is wrong on W-9 form. Use the TIN matching system to match and verify the TIN information as given on the W-9 form.

Do I issue W-2 or W-9 to part-time employees?

You must always issue a W-2 form to your employee, whether it’s a full-time, part-time or a seasonal employee. As far as they are on the payroll, they’ll be considered as employee.

Conclusion

Payers carry the responsibility of filing various tax forms correctly. Wrong misclassification of workers can lead to incorrect form filing and potential penalties.

In summary, W-2 is for employees and W-9 is for independent contractors. After receiving the W-9 form, you should also ensure a correct 1099 tax form filing.

To stay tax compliant, classify the workers correctly, fill in the form in time and keep track of forms.

Want to get more assistance with tax filing?

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