1099 vs. W-2 Employee: What’s the Difference and What Does It Mean for Your Taxes?

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There are two main types of workers when it comes to income taxes — 1099 contractors and W-2 employees. While W-2 employees are considered direct employees of a business, 1099 employees typically provide contract work or work in a freelance capacity.

One of the biggest differences between 1099 and W-2 employees is that employers are required to withhold income taxes from W-2 employees to pay the IRS — but do not withhold any taxes from 1099 employees.

What Is a 1099 Form?

A 1099 form is used to report income for multiple types of income received during the year. There are several different types:

• 1099 NEC or Non-Employee Compensation. This is for freelancers.
• 1099-MISC or Miscellaneous. This can be for many types of income like rent, prizes or royalties.
• 1099-INT or Interest. This is for accounts that earned interest like high yield savings accounts.
• 1099-DIV or Dividends. This is for any dividends your assets earned.

What Is a W-2 Form?

A W-2 form is used for direct employees of a business, and provides income and tax information for an employee. This includes salary, bonuses, other compensation, as well as taxes paid — such as Social Security and Medicare taxes. 

W-2 forms are used to prepare tax returns, and a copy is sent to both employees and the IRS. Employers must provide their employees with their W-2 forms by January 31, although it is possible to request an extension.

1099 vs W-2 Employee Comparison

Here’s how both W-2 and 1099 employees are treated by employers in regards to taxes, benefits, and the type of work each performs.

How Do I Know If I am a 1099 Contractor or a W-2 Employee?

It is up to the business to determine whether you are a 1099 contractor or W-2 employee. Here’s how you know:

• Tax Forms When You Start. Contractors fill out W-9s and Employees fill out w-4s.
• Job Responsibilities. Employers can control the specific tasks and roles that (W-2) employees fulfill and how they handle those tasks, while an independent contractor (1099) has a bit more freedom.
• Who Pays for Supplies. A business provides tools and supplies and reimburses expenses for employees — and is otherwise responsible for certain business aspects, while an independent contractor is typically responsible for their own business expenses.
• When You’re Paid. W-2 employees are usually paid on a rolling basis. 1099 contractors get paid per project.

What Is a W-2 Employee?

If you’re a W-2 employee, you are usually hired without a contract end date or specific deliverable. You’ll complete and sign a W-4 form when you’re hired, and receive a pay stub with each paycheck. 

Your employer can control what you do in your job and how to do it. You’re usually told when your working hours are, if you have to show up to the office or not, and exactly what tasks are required by your employment.

W-2 employees also have access to benefits — such as retirement savings plans and discounted healthcare plans. These benefits are provided by your employer, and you can contribute to them directly from your paycheck.

Some examples of W-2 employees include:

• Government workers
• Healthcare workers
• Restaurant workers
• Manager or leadership positions
• Hourly employees working labor, customer service or other jobs

What Is a 1099 Independent Contractor?

Independent contractors usually are hired for a specific project or task within a business — but aren’t promised unlimited work. Contractors must fill out a W-9 form to begin working for an employer.

Independent contractors may have a wide range of different work agreements. They may or may not have an ongoing contract for work over any period of time.

Independent contractors make agreements based on the results of their work and have the freedom to decide how to go about their work. Independent contractors are also responsible for working out their tax obligations rather than having an employer implement payroll deductions.

Here are a few examples of 1099 independent contractor employees:

• Project-based work such as consulting
• Gig workers driving for Uber or delivering food
• Contract workers hired through a temp agency or third-party
• Freelance workers such as writers, photographers or graphic designers

How Your Employment Status Affects Your Taxes

Whether a worker is considered an employee or an independent contractor ultimately impacts how your taxes are filed. Being classified incorrectly could leave you with higher-than-expected tax obligations.

Taxes and W-2s

One of the primary differences is that W-2 employees will have income tax withheld from each paycheck. In many cases, this means that employees can receive tax refunds when filing their taxes if deductions or other factors bring taxes payable below the total of those withheld funds.

Taxes and 1099s

Businesses do not have to withhold any income tax from payments to 1099 contractors, although they can if both parties agree. FICA payroll taxes that contribute to Social Security and Medicare include both an employer and employee portion. W-2 employees have that employer portion paid by the employer, but 1099 contractors have to pay for it on their own. That means contractors will pay a 15.3% tax rate.

Most 1099 workers will need to make quarterly estimated payments to the IRS to pay for self-employment taxes. Failure to make these payments could result in penalties or taxes from the IRS.

Pros and Cons of 1099 vs W-2

There is lots to consider when you’re being offered a 1099 or W-2 position. The best type of job can depend on your career and financial goals as well as your personality.

How Do Employers Decide Whether to Send a 1099 or W-2 Form?

Employers do not simply decide whether they would like to treat the people who work for them as W-2 employees of 1099 contractors. The IRS has specific guidelines to help employers classify their employees correctly.

This includes reviewing the worker’s duties, financial benefits and contractual relationship with the employer.

Whenever a business or employee is unsure about proper classification, either party can prepare and submit Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. The IRS will then review the facts and provide an official status decision. 

What If An Employer Misclassified An Employee?

If an employer classifies an employee as a contractor, but the employee should actually be treated as a W-2 employee — the employer will be liable for paying employment taxes for the worker. There are some relief provisions available if an employee has been misclassified, but the employer must present a reasonable basis to do so in the first place.

If you believe you have been misclassified as a contractor by your employer, you can file Form 8919, Uncollected Social Security and Medicare Tax on Wages. The IRS uses the form to determine and record your share of uncollected to “figure and report the employee’s share of uncollected Social Security and Medicare taxes due on their compensation,” according to the IRS.

Missing or Incorrect 1099 or W-2 Forms

Both W-2 and 1099 forms are due January 31 the following year. If a form is late or some information is incorrect, the first step should be to contact the employer or payer. If a form still hasn’t arrived in time to file taxes, the IRS recommends estimating income from all sources, including capital gains, to ensure that the return is filed on time and amend the return later.

If an employer or payer refuses to make a correction to an incorrect W-2 or 1099, the IRS recommends reaching out to an IRS Taxpayer Assistance Center. The IRS will send a letter to the employer to correct the issue.

Melanie Grafil and Teddy Garcia contributed to the reporting for this article.

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