1099 vs. W-2 Employee: What Is The Difference?
Whether a 1099 vs. W-2 employee is better for your business will depend on what you need done now and in the future, as well as what you can offer the employee. A 1099 worker is an independent contractor whom you pay for a specific task, while a W-2 employee is a person who receives a regular wage or salary for performing a role in your company. This article explains what is the difference between these two employee types and how to determine which one fits your business needs.
1099 vs. W-2 employee: What is the difference?
When you’re looking for employees for your small business, it’s important to understand what the difference is between 1099 and W-2 employees and determine how each could help your business. The terms “1099 worker” and “W-2 employee” refer to the respective IRS tax form employers are required to send.
Keep in mind that whatever you decide doesn’t have to be set in stone. You can change — or use a combination of both — to suit your business needs as they evolve.
What is a 1099 worker?
A 1099 worker is a self-employed individual who’s reimbursed based on the task(s) they complete. This type of employee can typically hit the ground running to accomplish a goal and is often less expensive to hire: Businesses can save around 30% by not needing to pay the taxes that they would for W-2 employees.
Here are examples of workers who’d receive a 1099:
- Gig workers who perform on-demand, temporary jobs for rates that employers offer, like selling concert concessions.
- Freelancers who set their own rates, accept the assignments they want and work on tasks for a short period of time, like wedding photographers.
- Independent contractors who set their rates, pick their assignments and work on a task for a long period of time, like lawyers who offer their services to the general public.
- Contractors who find work for a fixed period of time, such as a travel nurse.
- Consultants who are experts and are typically paid handsomely to give specialized advice, like lobbying consultants.
What is a W-2 employee?
A W-2 employee is directly on your company’s payroll and earns either an annual salary or an hourly wage. They are typically more expensive to hire for several reasons: Business must manage employee tax withholdings and pay state-mandated insurances, and W-2 employees may be eligible to receive benefits and job training. In exchange, companies have more control regarding when they work, how they work and the tasks they complete. Businesses usually want W-2 employees who perform well to remain with them for as long as possible.
A W-2 employee can work part-time or full-time. Here are three examples:
- Cafe baristas who work a set amount of hours.
- Salaried accountants at a business firm.
- Teachers at a public high school.
1099 vs. W-2: How to decide?
The answer to 1099 vs. W-2 employees depends on your current and future business needs. Here are some aspects that you should consider as a business owner when thinking about your hiring needs:
- Amount of work: How much work do you need done? Do you need someone to complete a few hours of work a week for the next three months? Or do you need someone to take on at least 20 hours a week for the foreseeable future?
- Talent availability and type of work: Do you need someone with specialized, hard-to-find knowledge right now? Do you have a longer time frame that will allow you to train someone?
- Turnover impact: How much will it affect your business if the person in this role changed frequently? Will the person be key to the company’s mission?
- Compensation abilities: Is your business able to sustainably support W-2 workers? Can it offer a large enough compensation package – either a healthy per-task rate or a salary, benefits and bonuses – to attract good talent? Wages went up in 2022.
1099 vs. W-2 employee: Compare and contrast
Here’s an overview of how 1099 vs. W-2 employees differ.
|1099 worker||W-2 employee|
|Best for||Specialized tasks||Committed help|
|Tax withholdings||The worker is in charge of their own tax withholdings||You are obligated to manage tax withholdings, including Social Security and Medicare|
|Tax forms||You provide a 1099 form||You provide a W-2 form|
|Payment||Pay is typically based on each task accomplished||Pay is typically hourly or salary|
|Insurance||The employee is in charge of sourcing all of their own insurances||You provide workers’ compensation insurance and unemployment insurance|
|Benefits||The employer isn’t expected to offer any benefits beyond pay||The employer may be expected to offer vacation and sick days, a pension, health insurance and more|
Examples of when a 1099 worker is best
A 1099 worker is typically less expensive than a W-2 employee and ready to immediately accomplish a task without any extra training. However, they can usually pick and choose what work they accept — as such, they may not always be available to take on the work you need done.
A 1099 worker is best when your business:
- Needs flexibility, extra hands on demand
- Doesn’t consistently have enough work for another person to take on
- Needs an inexpensive way to boost productivity
- Needs specialized expertise for a short time
Examples of when a W-2 employee is best
While W-2 employees are more expensive and typically expect fringe benefits, they also provide consistent benefits for the employer. They are obligated to take on tasks that fit their job description within their normal work hours.
A W-2 employee is best when your business:
- Needs committed help to handle the workload
- Needs a person to work at specific times
- Can sustainably support another person’s compensation package
IRS test to determine 1099 vs. W-2 employee status
The IRS provides basic guidelines to help delineate employee classification.
- Behavioral: How much control does the company have over what the worker does and how they do it?
- Financial: Who provides the resources for the worker (such as tools and supplies)? Does the employer determine how the worker is paid? Does the employer determine reimbursements?
- Type of relationship: What does the employment contract look like? How long will the relationship last? How essential are the workers’ tasks? Does the employer offer benefits?
Penalties for misclassification
To help protect workers from employers who would take advantage of the lower cost of a 1099 worker while demanding the same benefits of a W-2 employee, several government entities — such as the IRS, the Department of Labor and state agencies — can issue heavy penalties for misclassification.
Claims can go back as far as three years and are more severe when it’s proven that the business intentionally or fraudulently misclassified workers.
Possible penalties include:
- Back taxes and back wages
- Fines for improper bookkeeping
- Back payments on unemployment insurance and workers’ compensation premiums
- Payments for missed employee benefits, including 401(k) pension matching, stock options, paid time off, unpaid break time and health coverage
- Interest on all owed monies
There is a third type of worker classification available to businesses: interns and students. The Fair Labor Standards Act does not require that interns or students be compensated for their work. You can read more about unpaid interns from this Department of Labor page. If your business can provide educational training, including hands-on and clinical work, an intern or student may be an option outside of the normal 1099 vs. W-2 employee.