A W-2 reports wages for employees; a 1099 reports income paid to independent contractors. The key difference is who handles tax withholding — employers do it for W-2 workers; 1099 recipients pay their own taxes.
Whether you receive a W-2 or a 1099 depends on how the IRS classifies your working relationship — employee or independent contractor. The classification affects who withholds taxes, what forms you file, and what you owe.
Employers send Form W-2 to workers classified as employees. The employer withholds federal and state income taxes, Social Security, and Medicare from each paycheck and pays the employer's matching share of Social Security and Medicare.
Businesses send Form 1099-NEC to individuals they pay $600 or more as independent contractors. No taxes are withheld. Contractors pay their own income tax and self-employment tax (the employee and employer portions of Social Security and Medicare), typically via quarterly estimated payments.
The IRS weighs three factors: behavioral control (does the business control how work is done?), financial control (does it control payment and expenses?), and the type of relationship (contracts, benefits, permanency). Workers unsure of their status can file IRS Form SS-8 for a determination.
Lenders evaluate income differently for W-2 and 1099 earners. Employees often qualify with pay stubs; self-employed borrowers typically need two years of tax returns showing stable or growing net income.