The answer to this question essentially boils down to whether someone who does work for you is self-employed or an employee. Here’s the difference:

• Self-employed independent contractors are paid in full for their services and are responsible for settling up with federal and state governments at tax time. The payor reports payments on IRS Form 1099-MISC — assuming contractors earned more than $600 from them.

• Employees, on the other hand, typically have income tax, Social Security and Medicare payments withheld from their paychecks throughout the year (these withholding amounts are based on the elections they make on their IRS Form W-4). Employers issue them IRS Form W-2 to show them how much they were paid, as well as well as how much of their pay was withheld to pay income taxes, Social Security and Medicare.

Employers are also required to send copies of Forms 1099-MISC to the IRS, and forms W-2 to the Social Security Administration so if a contractor or employee fails to report any income on their tax returns, the IRS will kindly let them know. Depending on where you are located, your state may also require state copies of Forms 1099-MISC and W-2 that you issued.

Are there different types of 1099s or W-2s?

For the most post, Form 1099-MISC and Form W-2 are the standard forms used for these two types of worker. There are a handful of variations on each that are used in special circumstances, such as those involving earnings from qualified tuition programs or wages paid by American Samoa employers. The IRS has posted downloadable instructions for all available 1099-related forms here and all available W-2-related forms.

What if I run a business and I’m not sure whether someone is technically a contractor or an employee?

Check out this article for an in-depth explanation of the two. As an overview, the IRS has identified three categories of evidence designed to help you figure it out:

• Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

• Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

• Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

If you’re still not sure, you can file a Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) with the IRS. The IRS will review the facts and determine the worker’s status for you. The process can take up to six months.

For general information on the difference between independent contractor and employee, consult the IRS guidelines.