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It’s a big step for any business to hire an employee. Starting with contractors or gig workers could be a smart step to help your business grow without taking on the responsibility of full-time employees—but you have to know the legal distinctions to avoid misclassifying employees. We compared the 1099 vs W-2 forms, so you can quickly determine which you need to use and when to use it. Here’s what you need to know.
What Is a W-2?
The IRS Form W-2 is an employee’s Wage and Tax Statement. It’s a record of an employee’s compensation, benefits and taxes withheld for a given tax year. You fill out a W-2 for any worker who was classified as a part-time or full-time employee of your business at any point in a given tax year. You must file a W-2 for all employees who were paid at least $600 for the year. You must also file a W-2 for any employee for whom you withheld taxes, even if you paid them less than $600.
What Is a 1099?
A 1099-NEC is an IRS form that states how much you paid a nonemployee worker—such as an independent contractor. It lists compensations you paid a worker in a given tax year, plus any federal, state and local taxes withheld (likely none).
File a 1099 form for workers who you paid at least $600 for services but didn’t withhold taxes under an employment arrangement.
1099 Worker vs. W-2 Employee
1099 contract workers and W-2 employees are classified per the IRS based on how you work with and compensate them. The IRS lists three dimensions to be aware of when you’re classifying workers:
- Behavioral: Does the company control how the worker does the job? The more you control things, such as a worker’s work schedule and location, which tools they use and the methods they use to complete tasks, the more likely they are to be classified as an employee.
- Financial: Does the company control business aspects of the worker’s job, such as how they’re paid and whether they can seek other work in the market? If the answer is yes, it’s more likely the worker should be considered an employee rather than a contractor.
- Type of relationship: Does the employer provide benefits, such as insurance or paid time off? Is the job expected to last indefinitely? Are the provided services a key aspect of the business? If any of these are true, it’s possible a worker should be classified as an employee.
The IRS explicitly points out that a contract stating the worker is an independent contractor and responsible for their own taxes isn’t sufficient to consider the worker a contractor. Instead, the agency looks at the reality of your working relationship to determine the classification if it’s in question.
Examples of 1099 vs. W-2 Workers
The line between 1099 and W-2 workers can be murky, so you should consult a business or labor attorney if you’re unsure of the right way to classify and work with your workforce.
Here are some examples of each to give you an idea of who generally falls into each category.
Examples of 1099 Workers
- Freelance writers who work on an assignment basis, rather than set hours
- Consultants who support your company for a project with a clear start and end date
- Gig workers who perform services and get paid through an app (exceptions may apply in some states, such as under California’s unique gig worker status)
- Freelance designers and developers who work on an assignment or project basis
Examples of W-2 Employees
- Staff writers with scheduled hours (remote or in-office) and ongoing work
- Project managers with ongoing work and standing team meetings
- Delivery drivers with scheduled hours and routes who use a company vehicle or signage
- Staff designers or developers with scheduled hours (remote or in-office) and ongoing work
These lists and details aren’t nearly comprehensive but can give you an idea of employee versus contractor relationships. Lots of factors determine which way your workers should be classified and those factors can vary by state.
Which Type of Worker Should You Employ?
Whether you hire contractors or employees or a mix of both depends on your business needs and resources.
Many small businesses start out hiring contractors to help with support tasks and projects as the business grows beyond what a single owner can do but doesn’t yet earn revenue to support full-time employment. That can be a smart, lean way to grow—but you forfeit the behavioral, financial and relationship control you’d have with employees.
You might want to hire a contractor when:
- You have a set project or assignment in mind
- You don’t have guaranteed ongoing work
- You want to benefit from a service provider’s expertise, rather than provide training, strategy and protocols yourself
- The work doesn’t require scheduled hours or a set location
- The work can be performed independently without oversight
You might want to hire an employee when:
- You have ongoing work for the role
- The worker needs to follow your company’s protocols or use your equipment
- The work requires scheduled hours and/or a set location
- The work requires oversight and management
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Bottom Line
The difference between 1099 vs. W-2 workers can be tricky to parse, but the spirit of the classifications is clear: Contractors are self-employed workers selling you a service while employees work for the benefit of and under the rule of your business.
Once you know which kind of worker you’re hiring, choosing the proper tax forms and following tax requirements is simple. Contractors fill out a W-9 upon hiring, while employees fill out a W-4. At tax time, you file a 1099 for each contractor and a W-2 for each employee.
If the IRS determines a worker has been misclassified, you could be responsible for additional taxes on their pay, as well as unemployment insurance and benefits extended to other employees, such as health insurance and retirement plans. Clarity, before you hire, is also important to find the right kind of worker for the job.
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Frequently Asked Questions (FAQs)
Is it better to be on 1099 or W-2 as an employee?
The way an employee works with a company determines whether they’re classified as 1099 (independent contractor) or W-2 (employee). 1099 workers choose their schedule and methods for working, but they have greater tax responsibility and don’t have access to company benefit plans. W-2 workers may have to work on an employer’s schedule and according to the company’s protocols, but their taxes are paid automatically with payroll and they may qualify for company benefits.
Do you pay more taxes as a 1099?
1099 workers are responsible for 100% of Medicare and Social Security taxes and generally pay them quarterly while W-2 employees are only responsible for 50% of those taxes and have them taken out of their paychecks automatically. Both types of workers pay an income tax rate based on their tax bracket.
Is a 1099 considered a W-2?
No, these forms aren’t interchangeable. They’re used for the same purpose: as a statement of compensation for tax purposes. A 1099 is issued for contractors and a W-2 is issued for employees, who meet different criteria and have different tax implications per IRS regulations.
