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1099 Contractors vs. W-2 Employees: Categorizing Your Workforce

In the United States, W-2 is the standard employee classification, while 1099 contractors are independent freelancers, contractors, and other short-term workers. Misclassifying a W-2 employee as a 1099 contractor can result in significant financial, legal, and even criminal penalties—but figuring out the difference between a 1099 contractor and a W-2 employee can be tricky.

In this guide, we’ll break down the differences between these two employee classifications.

1099 Contractors vs. W-2 Employees

In the U.S, 1099 Contractors Independent contractors, freelancers, self-employed workers or gig workers are not considered employees of a business. They are called that because they receive a 1099 form at the end of the calendar year.

W-2 Workers Considered employees of the business, they may be full-time or part-time. They are called this because they receive a W-2 form at the end of the year. The following table summarizes the main differences between 1099 contractors and W-2 employees:

1099 Contractors
W-2 Employee
Considered self-employed
Considered as an employee of the company
Pay taxes quarterly
Taxes deducted from each paycheck
Not on the payroll
On the payroll
The company does not provide benefits
Benefits provided by the company
More autonomy,
Individuals usually decide when and how to work
Autonomy weakened,
Companies decide when and how they work
Typically use own equipment and resources
(i.e. personal laptop)
Regular use of business equipment and resources
(i.e. company laptop)
Not always eligible for unemployment benefits
Eligibility for unemployment benefits
Often serving multiple clients simultaneously
Work for one company at a time
Business expenses can be deducted
Many business expenses are not deductible
Often hired on a project-by-project basis
Maintain a longer-term commitment and relationship with the company

Why 1099 vs. W-2 Classification is Important

In the United States, there are severe penalties for misclassifying an employee as a 1099 contractor. Depending on the circumstances, an employer may have to pay some of the following fees if they misclassify a W-2 worker as a 1099 contractor:

  • Tax violation penalties for failure to pay Social Security, Medicare, Federal Insurance Contributions Act (FICA), and income taxes.
  • Fines of up to $1,000 are imposed on those who violate wage and labor regulations, such as overtime pay and benefit rights such as minimum wage.
  • Unpaid unemployment insurance and workers’ compensation premiums.
  • Back pay for wages and benefits during the misclassification period.
  • Legal fees arising from disputes and class actions.

In addition to these financial penalties, misclassifying an employee can severely damage your company’s reputation. Misclassified employees may leave your company entirely and warn other potential employees away from joining. If this happens, your company may have difficulty attracting top talent, which will have a cascading impact throughout your business.

Examples of 1099 vs. W-2 Workers

Both 1099 and W-2 work can take a number of different forms. Here are some examples of both types of workers to further clarify the difference:

1099 Workers

  • A consultant is working on a project with a limited time frame.
  • Freelance professionals such as writers and photographers.
  • An odd job where someone is hired to complete a task or project.
  • Contract workers hired through a temporary agency.

W-2 Workers

  • Employers of hourly employees in customer service jobs.
  • Salaried employees working in an office.
  • Executives and managers within the organization.

1099 Contractor Payments and Taxes

How 1099 Contractors Get Paid

Typically, 1099 contractors are paid via invoice. Invoices can be submitted on a specific schedule, such as monthly, or at certain project milestones, such as completion. Payment terms can be payable on receipt or 30 to 60 days. Contractors can be paid via cash, check, or direct deposit. The best payroll software, like Gusto, makes it easy to pay 1099 contractors and W-2 workers through the same platform, so you can centralize everything.

What taxes do 1099 contractors pay?

1099 contractors must pay several taxes, starting with full self-employment tax. The self-employment tax rate for 2024 is 15.3%, with 12.4% going to Social Security and 2.9% going to Medicare. They must also pay federal income tax, with rates varying by income bracket. If a 1099 contractor expects to owe more than $1,000 in taxes for the entire year, they must pay estimated quarterly taxes. They may also have to pay other taxes, such as state income tax.

W-2 Employee Wages and Taxes

How W-2 Employees Get Paid

W-2 employees can be salaried or paid hourly and are paid on a regular payroll. Most businesses pay pay every two months or every other week, while a few follow a weekly or monthly payroll schedule. Most W-2 employees are paid via direct deposit, but some may be paid by cash or check if they request it. Employers withhold taxes from each of their payroll checks—payroll software like Gusto automates these calculations and deposits to reduce errors.

What taxes do W-2 employees pay?

W-2 employees are taxed differently, with pay split between the employee and employer. Each paycheck will have 6.2% withheld for Social Security and 1.45% for Medicare, for a total of 7.65%. The employer then matches the same amount, doubling the tax paid to 15.3% — but unlike with 1099 contractors, only half comes from the employee’s paycheck. Each paycheck will also have the appropriate amount of federal and state income taxes withheld, depending on which income bracket the employee falls into.

What Type of Workers Should You Hire?

Still not sure where to hire a 1099 contractor or a W-2 employee? You should consider hiring a 1099 worker if:

  • You only need them for a short period of time, such as for a specific project or for maternity leave.
  • You have specific skills gaps internally that need to be filled temporarily, such as hiring an IT specialist to help with a software migration.
  • You need workers to work fewer than 30 hours per week.
  • You wouldn’t mind if this person also works for other companies.
  • You have no control over when, where, or how they get their work done.

You should consider hiring a W-2 worker if:

  • You need them to complete more than 30 hours of work this week.
  • You want to keep them for a long time, perhaps indefinitely.
  • You have an ongoing relationship with your workers and vice versa.
  • You want to have some control over how your employees work, such as requiring them to work at certain times or come to the office.
  • The work they will be doing is fundamental and indispensable to the business.

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