W2 v. 1099 – What’s the Difference?
There’s a different tool for each type of job, and the same thing applies to work. Each job requires a different type of worker, and today’s topic will be exploring the main types of staffing: through a W2 or through a 1099. There are major differences between these two types of workers, and classifying them properly with the IRS is important. Otherwise, you could face penalties from the IRS, or even a lawsuit against your business. Both are named after their respective tax forms: Companies provide a Form 1099-MISC to independent contractors that they work with, and employers file Form W2 on behalf of their employees.
A 1099 worker—or independent contractor—generally provides specific services, as defined by a written contract. Some 1099 workers only work on one project at a time, but many serve multiple clients, but all 1099 workers have the expectation of working for a defined period of time, per the conditions outlined in the contract. 1099 workers aren’t eligible for the benefits usually associated with a W2 employee (health, paid time off, etc.).
On the flip side, a W2 employee is your typical, salaried employee. Unlike independent contractors, W2 employees work for the company, participate in employee benefit programs, and work according to your business’s needs and schedule. Unless there’s a compelling reason to classify a worker as an independent contractor, the default classification is W2 employee. Employees are guaranteed at least minimum wage, and companies withhold their W2 workers’ Social Security and Medicare taxes. All the necessary tools and supplies for W2 employees, and are typically reimbursed for business expenses they incur over the course of their employment.
Here are some easy ways to determine whether or not a person qualifies as one or the other:
- Behavioral – Can your business control what, where, how, and when the worker carries out their job?
- Financial – Who controls the economic aspects of the worker’s job? What’s the method of payment (e.g. a regular salary or a flat fee)?
- Type of relationship – Do you provide this worker with employee benefits? What are the length and terms of this relationship, as outlined in a contract, employment agreement, other documentation?
As you can see, sometimes it makes more sense to engage the services of an independent contractor than it does to hire an employee. At other times, though, you’ll need to hire an employee to get the job done. Whichever way you go,
