Forms 1099 and W-2: definition and audit meaning

Definition

Form W-2 reports wages, tips, and withholding for employees, filed with the Social Security Administration with copies to employees. Form 1099-NEC reports nonemployee compensation paid to contractors, filed with the IRS with copies to recipients. Both are generally due January 31 for the prior year, moving to the next business day if that date falls on a weekend or holiday. For payments made after December 31, 2025, the reporting threshold for Form 1099-NEC and most Form 1099-MISC payments rose from $600 to $2,000. The IRS says it may be adjusted for inflation beginning in calendar year 2027. Royalties and some other 1099-MISC items keep their separate, lower thresholds.

Why it matters in an audit or review

Payroll and contractor testing in an audit use these forms. The auditor reconciles W-2 totals to payroll registers and the general ledger, and checks that contractors are not misclassified, since reclassification can create payroll tax exposure. Typical findings in contractor testing include missing 1099s and backup withholding errors. Worker classification disputes can create accruals under ASC 450.

Example

Illustrative: total W-2 box 1 wages differ from the general ledger payroll expense by $42,000. The auditor traces the gap to a bonus accrued in December and paid in January, which explains the timing difference.

Common mistakes

Using the old $600 threshold for 2026 payments, or treating all contractors as outside payroll tax risk.

FAQ

Does the new threshold change W-2 filing?

No. W-2s are required for all wages. The change applies to certain 1099 forms.

Sources

IRS, Instructions for Forms 1099-MISC and 1099-NEC: https://www.irs.gov/instructions/i1099mec
Public Law 119-21, section 70433 (amending Internal Revenue Code section 6041)
IRS, General Instructions for Certain Information Returns (due dates)
FASB ASC 450-20, Loss Contingencies

Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error

Form 1065 is the partnership return, Form 1120-S the S corporation return, and Form 1120 the C corporation return; the first two pass income to owners, while the third pays entity-level tax.

Schedule K-1

Schedule K-1 reports an owner's or beneficiary's share of income, deductions, and credits from a partnership, S corporation, or trust, and feeds the owner's return and tax basis tracking.

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Forms 1099 and W-2