1099 vs. W-2 Employees

Many businesses employ both full-time staffers and contractors, and it can be tricky to differentiate between the two — particularly when they have similar roles and responsibilities. 

But there are significant differences, both in terms of workers’ personal bottom lines and in the eyes of the IRS.  

To better understand the nuances between the two designations, the first place to start is with the tax forms each group uses. Simply put, 1099s and W-2s are two separate tax forms for two different types of workers. 

What is a 1099? 

A 1099 is the tax form a company issues to an independent contractor and shows how much you were paid for the year. If you’re a contractor, you are responsible for calculating your own payroll taxes and then submitting the sum to the government on a quarterly basis. 

What is a W-2? 

A W-2 is the tax form an employer uses to report an employee's annual income. As a W-2 employee, you have payroll taxes automatically deducted from your paycheck, and your employer pays the government directly. 

1099 vs. W-2 employees 

When it comes to who should be classified as an employee and who should be considered an independent contractor, several factors are considered. 

Independent contractors get a 1099 

Some of the factors that make you an independent contractor include: 

• Setting your own schedule. 

• Using your own personal method for finishing assignments. 

• Accepting tasks on a case-by-case basis — and can turn down offers of work. 

• Supplying your own tools. 

• Having more than one client. 

Basically, if you do your job well and finish it on time, the company usually doesn’t have much contact with you while you’re working. 

Advantages of having your income reported on a 1099 

Independent contractors may be able to deduct more expenses on their tax returns than W-2 employees can, including home office expenses, computer equipment and professional memberships 

Employees get a W-2 

You're usually a W-2 employee if you: 

• Have assigned hours or a set schedule. 

• Get trained by the company in a certain method. 

• Complete any and all work assigned to you by a manager. 

• Are provided the tools and materials necessary to finish your work. 

• Have only one employer. 

Advantages of being a W-2 employee 

Compared to contractors, employees usually have relatively little control over their own work — but they do generally have stability and benefits, with one of the most important ones being health care. W-2 employees also don't have to pay certain taxes that independent contractors are responsible for, such as the employer's Social Security and Medicare tax contribution. 

Contractors, however, are totally on their own when it comes to benefits, but there’s one plus for this group come tax time: If you supply your own tools and materials, you’re able to deduct those expenses. That laptop and cushy office chair you just bought? Both deductible. 

W-2 employee misclassified as a 1099 independent contractor 

If you feel like your own job falls under the definition of a W-2 employee but you’re classified as a 1099 contractor, it’s important to speak up. For instance, if you feel like your client is exerting too much control over your workflow for you to be properly considered a contractor, they could be at risk for penalties and fines, and you may not be getting the benefits you should. The company will generally have two options: Either they’ll have to release control, increasing your freedom over your work and schedule, or they’ll have to reclassify you as an employee and start providing you with the benefits, tools and infrastructure due to employees.