1099 vs. W-2: Breaking Down the Differences

There are two main categories of work in the eyes of the IRS — 1099 contractors and W-2 employees. These two types of work involve different tax forms and come with different tax obligations for employers and workers.

Generally speaking, W-2 employees have taxes withheld from their paychecks by their employer, while 1099 contractors are responsible for paying taxes on their own

The difference between 1099 work and W-2 work also depends on the nature of the employment relationship — and there are strict rules about which kinds of workers can be given each classification. Here’s what to know.

1099 workers get that name from the 1099-NEC tax form they receive from their employer(s) each January or February.

The form lists the amount of nonemployee compensation they received from a particular employer. 1099 forms typically show the gross amount paid in the previous year since the employer does not withhold tax unless the worker is subject to backup withholding.

The employer (or “payer,” in tax jargon) sends the 1099 form to the IRS and also provides workers with a copy to help them determine their total income (and income tax liability) when filing their annual income tax return.

W-2 employees are so named because their employers send them a W-2 form at the beginning of each year, listing their compensation from the previous year and the amount of income tax withheld.

Employees who earned $600 or more in the previous year get one and use it to complete their tax returns. A W-2 form also contains additional information that isn’t applicable to a 1099 worker, including pre-tax payroll deductions such as 401(k) contributions and employer-sponsored health insurance plan costs.

Like 1099 forms, employers send a copy of a W-2 form to both the IRS and the employee.

1099 contractors vs. W-2 employees

The IRS provides rules for classifying 1099 vs. W-2 work. The guidelines are divided into three categories: behavioral, financial and type of relationship.

• Behavioral. Typically, W-2 employers have the right to control how, where and when a worker does their job — for example, by mandating certain working hours, making a worker come into an office or providing specific tools for the job. 1099 employers don’t have this kind of control, and can only set deliverables and deadlines.

• Financial. W-2 employment generally means work for a regular paycheck (subject to minimum wage and overtime laws), while 1099 work can involve one-off or irregular payments at any pay rate. W-2 employees are also often reimbursed for work-related expenses, while 1099 workers are usually responsible for their own expenses.

• Type of relationship. W-2 employment may come with benefits and often has an indefinite timeframe. 1099 work, on the other hand, generally doesn’t come with benefits and may be limited to a specific timeframe or the completion of a specific project.

If a business is having trouble determining whether a worker should be classified as 1099 or W-2, it can submit Form SS-8 to the IRS and let the agency decide^[0].

As discussed previously, W-2 workers are typically people who have to show up to a workplace and/or have set working hours. They typically receive a regular paycheck with income tax withheld and may also get benefits.

A non-exhaustive list of jobs that are typically classified as W-2:

• Office and factory workers.

• Waiters, cooks and retail associates.

• Health care workers in hospitals or clinics.

• Most government employees.

• Maintenance workers who work for a business, such as janitors.

1099 workers generally set their own hours and work conditions and may be paid on a one-time or sporadic basis. They generally don’t get benefits or income tax withholding. This kind of worker includes, but is not limited to:

• Freelance writers, graphic designers and other creative workers.

• Sole-proprietor tradespeople such as handymen.

• Gig-economy workers such as delivery and ride-share drivers.

Withholding isn’t the only tax difference between 1099 work and W-2 employment. The two types of relationships have very different implications for tax due dates, Social Security and Medicare taxes and federal unemployment insurance — for both workers and employers.

As discussed, the biggest difference between 1099 work and W-2 work, from a worker’s perspective, is the lack of tax withholding for 1099 work.

While an employer handles tax withholding for a W-2 worker, remitting taxes to the IRS on the employee’s behalf, 1099 workers are responsible for paying taxes on their own.

This means 1099 workers may need to pay estimated taxes quarterly if they have a significant amount of 1099 income in order to avoid a large tax bill or an underpayment penalty in April. If their 1099 work totals $400 or more, they may also owe self-employment tax, which is a combination of Social Security and Medicare taxes^[0].

But there are some tax-related upsides of being classified as a 1099 worker, including a variety of tax deductions that are not available to W-2 employees. These include certain unreimbursed business and home office expenses — and in some cases, even health care expenses.

Another tax-related difference between 1099 work and W-2 work is which form each worker fills out at the beginning of their employment. 1099 workers fill out Form W-9 when starting a new job, while W-2 employees fill out Form W-4.

There’s a big difference in the amount of tax-related work a business has to do for 1099 contractors compared with W-2 employees.

Businesses usually have to withhold at least some of a W-2 employee’s federal and state income tax from their paychecks, depending on what level of withholding the employee chose on their W-4. They also generally must withhold the employee-paid portion of the FICA tax.

Employers also have to pay certain taxes for W-2 employees. These include the employer portion of the Social Security and Medicare tax, as well as the federal unemployment insurance (FUTA) tax^[0].

Businesses don’t have to withhold taxes from payments to 1099 workers unless a worker is subject to backup withholding according to their W-9. Payments to 1099 workers don’t generate any FUTA tax liability for businesses, as 1099 workers generally aren’t eligible for unemployment insurance. They also don’t generate any employer-side Social Security or Medicare tax liability, as 1099 workers pay these taxes themselves, in full, through the self-employment tax.

In short, a business’s tax responsibilities for a 1099 worker usually consist solely of collecting a W-9 at the beginning of the job and then filing a 1099 form for each year of work as applicable. Like W-2 forms, 1099-NEC forms must be sent out to the worker and the IRS by January 31.

Misclassifying W-2 employees as 1099 workers

Given that 1099 relationships involve much less tax liability (and much less work) for businesses, employers may be tempted to say that onsite workers with set hours — in other words, W-2 employees — are 1099 workers, to save themselves some money and time. They may also be tempted to do this to skirt minimum wage and overtime laws for their workforce.

Misclassifying employees can lead to serious legal consequences, including fines and penalties, repayment of all uncollected employment taxes, and in some severe cases, jail time.

Employees who suspect that they are being misclassified can complain confidentially to the Department of Labor^[0]. Employees can also submit Form SS-8 to the IRS to force a decision between 1099 and W-2 status in an ambiguous situation.