W-9 vs. W-2: The key differences between employees and contractors

Growing your business often requires bringing in help, whether through employees or independent contractors. A recent Intuit Entrepreneurship Survey found that 44% of business owners plan to expand their teams by hiring new staff or adding freelancers.

However, adding new team members means dealing with tax forms—specifically, W-2s for employees and W-9s for independent contractors. Correctly classifying these workers is critical, as the difference in payroll and tax responsibilities is substantial. Plus, misclassification can lead to significant penalties for your business.

In this article, we’ll review the difference between W-9 vs. W-2 tax forms, explain the employee classification rules, and offer guidance on when to use the W-2 process vs. the W-9 process.

• What's the difference between a W-9 vs. W-2?
• How do tax responsibilities vary between a W-2 vs. W-9?
• What are the IRS worker classification tests?
• How to know whether to use a W-2 vs. W-9?
• Find peace of mind come tax time

What's the difference between a W-9 vs. W-2?

The main difference between the two forms is classification: employers use W-2s for employees, and W-9s for independent contractors. While both W-2s and W-9s are completed annually, employers only send W-2s to the Social Security Administration (SSA) and the IRS, not W-9 forms.

One final difference between the forms is tax withholding. The purpose of the W-2 is for employers to report wages paid and taxes withheld for each employee. Independent contractors, on the other hand, are usually not subject to withholding. Instead, the company that uses their services will file a 1099 form to report taxable wages.  

What is a W-2 Form?

A W-2 form is what employers use to record the wages they paid each employee. It also records all taxes withheld, such as federal income tax, Medicare tax, Social Security tax, and state/local taxes. These calculations are based on the W-4 forms that employees fill out when they are hired or when their situation changes (i.e., an employee gets married). 

Each year, employers must file W-2s for all of their employees by January 31. The forms go directly to the SSA, which then sends them to the IRS. A copy must also be sent to employees so they can file their taxes. 

What is a W-9 Form?

Employers use a W-9 form to collect the taxpayer identification number (TIN) from independent contractors, freelancers, or other non-employees who receive payments. Because independent contractors are responsible for paying their own taxes, no withholding is calculated, and the form does not need to be sent to the IRS. 

Instead, at the end of the year, the info on the W-9 tax form is used to prepare 1099-NECs, which are sent to the IRS and the contractor. 

Essentially, a W-9 is a way to ensure income is reported for the correct individual/entity. A W-9 should be collected before the first payment is made to a contractor and is often reviewed annually.

How do tax responsibilities vary between a W-2 vs. W-9?

As an employer, the burden of tax withholding and reporting falls on you. For each employee, you’ll need to have detailed records and ensure you remit tax payments to the federal and local governments on time. Aside from filling out a W-4, the employee doesn’t need to do anything.

But when paying independent contractors, the responsibility falls squarely on the contractor to manage their own tax payments and reporting. The employer is only responsible for recording a TIN (through a W-9) and reporting payments made to the contractor using a 1099-NEC. The contractor must then report their income and pay their taxes quarterly to the IRS using Form 1040-ES.

What is the importance of Form 1099-NEC?

When you collect a W-9 from an independent contractor, it is eventually used to generate 1099-NECs at the end of the year. The IRS requires that you send a 1099-NEC when you pay a contractor $600 or more in a calendar year. Starting in 2026, this threshold will rise to $2,000, and is due to the IRS by January 31.

Essentially, the 1099-NEC is an independent contractor’s equivalent to an employee’s W-2. This form is used to calculate their tax liability (how much self-employment tax is owed for the year) and to file taxes by the due date. For employers, a 1099-NEC can help support tax compliance and assist with tracking business expenses.

What are the IRS worker classification tests?

To stay compliant with tax laws, business owners need to classify workers correctly. Mistakenly classifying a worker as a W-9 contractor when they should be a W-2 employee can result in hefty IRS penalties. 

To help employers determine how workers should be classified, the IRS provides three classification criteria: 

1. Behavioral control: Do you, the company, control what the worker does or how they perform their job? For instance, do you provide training or detailed instructions on when, where, and how to work?
2. Financial control: Do you, the company, control the financial and business aspects of the worker’s job? For instance, do you reimburse the worker for business expenses or provide them with tools and equipment to do their job?
3. Relationship type: Are there written contracts defining your relationship with the worker, and are benefits provided? For instance, do you provide insurance?

If the answer to any of the above questions is yes, then the worker likely should be classified as a W-2 employee. If the answer to all of the questions is no, then the worker likely should qualify as a W-9 independent contractor. 

IRS worker classification example

XYZ Marketing Firm has a worker, Laura, whom they are trying to classify. Laura was hired on a contract basis for graphic design work. Laura can pick and choose her projects and pays for her own software. Because she has a contract stating she’s a freelancer, and XYZ Marketing has no control over her work or job finances, Laura is classified as a W-9 contractor.

Now, if XYZ Marketing decided to keep Laura on after her contract expires, starts reimbursing her for the cost of the task management tools, assigned her a set work schedule, and provided her a copy of the company work manual, then she would likely need to be reclassified as a W-2 employee. 

What are the penalties for worker misclassification?

Misclassifying a W-2 worker as an independent contractor can come with significant penalties. From back taxes to legal fees, here are some of the consequences you may face:

• Back taxes: You will need to remit the employer portion of FICA taxes for workers deemed W-2 employees.
• Unemployment tax: W-2 employees qualify for unemployment, so you’ll need to make state and federal payments and may be subject to penalties for late payment. 
• Failure to pay penalties and interest: For not making timely tax payments, you may be charged with a penalty of 0.5% a month plus interest charges.
• W-2 fine: A $330 fine applies for each unfiled W-2
• IRS fine: If the IRS determines you intentionally misclassified employees, you may incur a $1,000 fine per employee. 
• FLSA penalties: Since W-2 employees have protections for overtime, leave, and minimum wage, you’ll be penalized for any laws you violate, plus you’ll need to pay workers for benefits due (e.g., pay for overtime worked). 
• Backdated benefits: Any benefits you offer employees, like insurance or paid time off, will be due to the employee immediately. 
• State penalties: Some states have their own penalties, like California, which fines businesses $5,000 to $25,000 for each violation. 
• Legal fees: For misclassifying employees, you can face lawsuits and criminal charges. 

These are just the financial consequences you may encounter. As a business, getting hit with IRS penalties and employee lawsuits can also damage your reputation with the community, suppliers, and customer base.

How to know whether to use a W-2 vs. W-9?

The type of tax form that needs to be filled out will generally depend on a worker’s classification. For employees, you’ll need to fill out a W-2; for contractors, you’ll need to collect a W-9.

When to use the W-2 process

For workers who qualify as employees, you’ll need to follow the W-2 process. Workers are generally considered employees when they are: 

• Supervised and given specific instructions on how to perform the job.
• Paid a regular salary or hourly wage.
• Integral to the main operations of the business.

For instance, a cashier who works the register at a clothing boutique would be supervised, paid an hourly wage, and is essential for completing sales. 

The W-2 process starts with obtaining employee withholding information using a W-4. You then must track wages, calculate withholdings, and record benefits paid throughout the year. Come tax time, this information is used to generate a W-2. 

Because this process can be time-consuming and complex, it's best to use a system like QuickBooks Payroll to help you manage your W-2 workers. From automatic withholding to calculating tax liabilities to filing quarterly (Form 941) returns and generating W-2s, the software can help you with all your payroll and tax needs.

When to use the W-9 process

The W-9 process is used for independent contractors. Workers are generally classified as contractors when they:

• Are self-employed (freelancer, independent contractor).
• Control their own schedule, tools, and methods.
• Are hired for a single, specific project or short duration.

For instance, a graphic designer who is hired to create a company logo for a flat fee would be considered an independent contractor. 

When you bring a contractor on, you will need to send them a W-9 form for them to complete. Throughout the year, you’ll need to record payments issued to the contractor, and then at the end of the year, use this information to file a 1099-NEC. 

With a tool like QuickBooks Contractor Payments, you can easily collect and manage W-9 forms, track payments made, and automatically generate and file 1099-NECs at the end of the year.

Find peace of mind come tax time

Tax time is stressful enough without adding in the complexities of managing W-9s vs. W-2s. To save time and avoid audits or penalties, use QuickBooks. From tracking hours and pay, to generating tax forms and applying tax deductions, the QuickBooks accounting software can help streamline your tax prep and bring you peace next tax season.