Your tax obligations vary between 1099 contractors and W-2 employees. You pay 1099 workers per the terms of their contract. At the end of the year, they receive a 1099 form to report their income on their taxes.
As a business owner, you’re not on the hook to withhold or pay taxes for 1099 contractors. These workers pay their own taxes and provide their own benefits. Because of this—and due to the nature of their expertise—1099 contractors can be expensive to hire.
If you pay a 1099 worker $600 or more for services provided during the calendar year, you’ll need to complete Form 1099-NEC. You must provide a copy of this form to the contractor by January 31 of the year following their payment. You must also send a copy of this form to the IRS. If the contractor hired their own workers or subcontractors while working for you, they’re responsible for filing paperwork for these workers.
W-2 employees receive a regular wage and employee benefits. As a business owner, it’s your responsibility to withhold taxes from their paychecks and report those taxes to the IRS on a W-2 form.
Additionally, you must deposit federal income taxes, unemployment taxes for unemployment insurance, and Social Security tax and Medicare taxes for yourself and your employee. You must report on the taxes you deposit, as well as employee wages, tips, and other compensation. Finally, you must deposit and report your employment taxes on time. The IRS has helpful information on depositing and reporting employment taxes for W-2 employees.