There is sometimes confusion when it comes to deciding between a contract W2 vs 1099 form if you need to file year-end taxes for workers that you hire from a temporary agency. The following guide will help clarify the appropriate tax form for these types of employees.
We have also included a guide to both W2 and 1099 forms that will help you understand who gets what form. To cover any and all of your tax form needs, AMS tax software provides easy solutions to keep you on track during tax season.
When Would a Temporary Worker Receive a Contract W2 vs 1099?
The IRS treats contractors and employees differently during tax season. Typically, these two roles have clear definitions and are easy to file taxes for. However, temporary workers are an interesting case. Businesses have contracts with temporary workers, but those workers are employed at an agency.
In the first quarter of 2025, the American Staffing Association found that staffing companies employed an average of just under 2.0 million temporary and contract workers per week.
Businesses need to know whether to file a contract W2 vs 1099 or if the agency will handle their taxes. Since temporary workers at an agency are not classified as self-employed, businesses should not consider them contractors. Temporary work agencies hire workers as employees.
The work agency is responsible for filing W2s for their employees each tax season since the agency pays the workers, not the businesses who are using their services.
The only reason a temporary worker would receive a 1099 is if that worker is independent of an agency and is self-employed. Understanding your business’s relationship to workers is the best way to know what tax forms you are responsible for filing.
Understanding the Differences Between Contract W2 vs 1099
W2 forms and the 1099-NECs report income from the current tax year. Businesses use W2s for employees since the employer withholds a percentage of the employee’s total earnings for:
- Federal taxes
- State taxes
Using a W2 form allows employers to see:
- How much they paid an employee
- How much the IRS has already taken
Form 1099-NEC and Form 1099-MISC are respectively used for:
- Contracted workers who pay their own employment taxes
- Reporting other types of miscellaneous income
Businesses who utilize a contractor do not withhold any of their pay for taxes. File a 1099 to report the amount that you paid a contractor if it amounts to $600 or more for the tax year.
Frequently Asked Questions
- Can my temporary employees claim exempt status on a Form W-4? – Yes, if it is a rare circumstance where they meet the IRS’ requirements. It is important that you are aware of any outlier situations prior to onboarding temporary employees, but keep in mind that a staffing agency is generally responsible for these and other tax forms.
- Are overtime rules the same for temporary employees? – Yes, these types of employees often encounter the same federal and state overtime laws as any business’s permanent employees. Using payroll software with overtime calculation will help to ensure full and accurate compensation.
How AMS Software Can Help with Tax Forms
You might have to file a variety of tax forms each year based on the type of workers that you pay. Our W-2/1099 Forms Filer base program makes completing filings easier and accurate. The software offers:
- Customizable modules that let users purchase tools as needed
- Form generation whenever you need specific documents
- Organization for all of your employee’s files
Take the confusion out of tax season with convenient, easy-to-use tax software. Download our free 1099-etc Demo software or speak to our Sales and Information team at (800) 536-1099 to see how our software can work best for your needs.