1099 vs. W-2 Employee: What’s the Difference and Which Is Right for You?

At tax time, employees will get a form that shows how much they earned the previous year from each company they worked for. But some will get a W-2 form, and some will get a 1099-NEC form. So what’s the difference, and which is right for you?

Employees who work for a company get a W-2 form. The company will withhold income taxes and may provide benefits like health insurance and paid sick or vacation time. Those who get a 1099-NEC form are independent contractors, and the companies they work for are clients, not employers.

1099 vs. W-2: At a Glance

What Is a W-2 Employee?

W-2 refers to the Internal Revenue Service (IRS) form on which an employee’s wages are reported for tax purposes. A W-2 employee is one who is hired by a company to do a specific job at a specific rate of pay, whether hourly or salaried. The employee will remain employed by the company until one party decides to terminate the relationship.

• A W-2 employee may receive benefits from the employer in addition to their base wage, including health insurance coverage, vacation or paid time off and a retirement savings plan.
• A W-2 employee is protected from discrimination and illegal termination by employee protection laws.
• When working as a W-2 employee, your employer will withhold income taxes from your paycheck and pay them to the state and federal revenue departments on your behalf.
• When you file your income tax return, you may get a refund if your employer withholds more tax than you actually owe, or you may have to pay additional tax if they withhold less.
• An employer pays half of each W-2 employee’s Old-Age, Survivors, and Disability Insurance (OASDI) tax — 6.25% of earnings — and the employee pays the other 6.25%.

What Is a 1099 Independent Contractor?

An independent contractor is a worker whose earnings are reported on IRS Form 1099-NEC. Independent contractors are often hired for specific projects that don’t require a full-time or long-term employee. A 1099 independent contractor can typically be terminated at any time, with little or no notice.

• Independent contractors run their own business, and they work for clients rather than an employer.
• The independent contractor is both employer and employee, so they pay both halves of OASDI tax, or a total of 15.3% of their earnings.
• Independent contractors have more flexibility in terms of how they do their work, as the client can dictate what needs to be done and provide the tools needed to do it, but it is up to the contractor to determine how the work is done.
• Independent contractors are common in creative industries, like copywriting and graphic design, in construction and design firms, and in technology.
• Many gig workers and those with side hustles are 1099 contractors.

How the IRS Decides: 1099 vs. W-2 Classification Tests

Some employers may attempt to classify workers as 1099 independent contractors rather than W-2 employees because it can be less expensive for the employer. To determine if a worker is truly an independent contractor or a W-2 employee, the IRS asks three questions.

The IRS 3-Factor Test

• Does the company control or have the right to control what the worker does and how they do it? If they do, the worker is a W-2 employee. If not, they can be considered an independent contractor.
• Does the business direct or control the financial and business aspects of the worker’s job? This includes things like how the worker is paid — hourly vs. salary, direct deposit vs. check — whether expenses are reimbursed, and if tools or supplies are provided. If the business controls these things, the worker is a W-2 worker.
• What is the relationship of the parties? Are there employee benefits or a written contract that indicates the person is an employee? Will the relationship continue and is the work performed a key aspect of the business? If the answer to these questions is “yes,” the worker is a W-2 employee.

How 1099 vs. W-2 Affects Your Taxes

There are two major ways in which your taxes will be affected if you are an independent contractor or a W-2 employee.

Tax Withholding

Employers are required to withhold federal, state, and local — if applicable– income taxes from the paychecks of their W-2 employees. This means that your taxes are paid as they are incurred, so you won’t be penalized for not paying on time. It also means that you may get a tax refund when you file your taxes if your employer withheld more than you owe.

If you are an independent contractor paid on a 1099-NEC form, no taxes will be withheld from your pay. This means that you need to make quarterly estimated tax payments or you could be subject to a late payment penalty.

OASDI Taxes

The OASDI tax, which is commonly referred to as the Social Security and Medicare Tax, is paid by both employers and employees. Since independent contractors are both employer and employee, they are responsible for the total amount of this tax.

If you are a W-2 employee, your employer will pay 6.2% of your pay as Social Security tax and 1.45% of your pay as Medicare tax. They will withhold the same amount from your paycheck for your share of this tax.

If you are a 1099 independent contractor, you are responsible for paying both halves of these taxes, or a total of 12.4% of your wages for Social Security tax and 2.9% for Medicare tax. This amount should be included in your estimated tax payments.

Pros and Cons of 1099 vs. W-2 Work

Both types of work, employee and independent contractor, have advantages and disadvantages. Here are some of them.

1099 Work Pros and Cons

W-2 Work Pros and Cons

Can You Be Both 1099 and W-2 in the Same Year?

A worker can be paid as both a 1099 independent contractor and as a W-2 employee in the same year. In fact, some workers have a full-time W-2 job and a 1099 side hustle at the same time — just not with the same employer.

If an employer changes a worker’s classification from a 1099 independent contractor to a W-2 employee, or vice versa, they must also change the way they work so they aren’t misclassifying the worker.

Which Is Better for You? Quick Examples

Whether being a W-2 or a 1099 worker is better for you can depend on a number of factors, including your experience level, your level of financial security, the employment market in your field and more. Here are some scenarios that illustrate your options.

Freelancer

A freelancer will typically choose to be a 1099 worker, as they may have multiple contracts or assignments at one time. Working as an independent contractor gives them the flexibility to turn down work that doesn’t align with their goals or schedule.

Full-Time Work With Advancement Potential

Workers looking for a career where they can move up the ladder will want to consider work as a W-2 employee. They will likely learn new skills and be able to advance in their career, plus they may have benefits such as health insurance and a retirement plan.

Full-Time Employee With a Side Gig

When someone with a full-time job wants or needs to pick up some extra cash, they may choose to start a side gig as an independent contractor. They can retain their job as a W-2 employee while adding a second 1099 job.

Gig Worker Who Needs Flexibility

For workers who don’t want a full-time job or want to be able to take as much time off as they want, gig work as an independent contractor can fit the bill. Work when you want, get paid when you work.

Employer Responsibilities and Misclassification Risks

The IRS is very specific about the criteria for being classified as a 1099 independent contractor or a W-2 employee. Employers must classify workers correctly or risk fines or penalties.

• The consequence for misclassifying a worker as an independent contractor when they should be classified as an employee is that the employer will be liable for the OASDI taxes for that employee.
• They may also face liability for not withholding income taxes for the worker.
• Employers can file IRS Form SS-8 to get an official determination of a worker’s classification for tax purposes.

What To Do If You Think You’re Misclassified

As a worker, you should notify your employer if you feel your classification is incorrect. If you should be a W-2 employee and your employer is treating you as an independent contractor, you’re paying twice as much in OASDI tax as you should be, so speak up.

You can also file IRS Form 8919 to calculate and report your share of uncollected taxes.

Missing or Incorrect 1099 or W-2 Forms

Mistakes happen, and it’s not uncommon for a 1099-NEC or W-2 form to be incorrect. If that happens to you, here’s what you need to do, according to the IRS:

• Contact the employer or issuing agency
• Inform them that your form is missing or incorrect
• Request a new or corrected form
• If you don’t get a correct form by the end of February, call the IRS for help
• File your return on time, even if you don’t have the correct form — you can amend it later

Key Takeaways

• Independent contractors run their own business and perform services for client companies.
• Employees are hired, paid and directed by the company.
• W-2 workers have taxes withheld from their paychecks and often receive benefits like health insurance and paid vacation.
• Independent contractors have to pay their own quarterly taxes and buy their own health insurance, and do not get paid if they don’t work — if they’re sick or go on vacation.

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