With the number of forms issued by the IRS, it’s easy to get lost in the alphabet soup of tax law. But no matter what side of the question you’re on —the hirer or the hired — it’s crucial to understand the difference between a 1099 worker and a W2 employee so you know what’s best for you. Let’s break it down.
The Basics — W2 vs 1099
The W2 Employee
This is the classic form of employment most people historically think of, usually between an employer and a payrolled employee. The employer withholds payroll taxes that they contribute on the employee’s behalf to various programs (like Social Security and Medicare) and income tax. Employers are also required to pay some taxes on their own, like federal unemployment tax, and must provide workers’ compensation coverage (an insurance policy that protects the worker if they’re injured while employed). When an employee receives their W2, they can see all of the taxes that their employer contributed on their behalf.
A W2 establishes an employer/employee relationship, which means the employer and employee have certain rights. The employer, for example, has the right to tell the employee when to show up to work and how to perform their job. The employee has rights to legal protections like minimum wage and overtime, and the employer provides the tools and training for the employee to perform their work.
The 1099 Worker
A 1099 worker (also called a gig worker, independent contractor, or vendor) is someone who works outside of the strict employer/employee relationship. Calling someone a 1099 worker is a little bit of shorthand since all sorts of income an individual might receive come on 1099 forms: interest income earned on a bank account will be reported on a 1099-INT, income from a retirement account on a 1099-R, and unemployment compensation is reported on a 1099-G. But since an independent contractor is not an employee, they don’t earn money on a W2 — they earn it on a 1099-NEC (non-employee compensation). This means when they pay their taxes, they’re responsible for both the employer’s and employee’s tax contributions on the money they earn. This is often called a self-employment tax.
Since a vendor or gig worker is not working as an employee, the hiring company only has “the right to control or direct only the result of the work, not what will be done and how it will be done.” The 1099 worker simply has to present the finished work to the hiring company, and the worker can choose how to do it: they can use whatever equipment they want, they can perform it where and when they want and they can even choose to subcontract it to another worker or hire an employee to do it.
What’s the Best Option for Workers and Hirers?
Neither one is objectively better or worse for either the client/employer or the vendor/employee. They’re different tools for different situations. The employer/employee relationship is stricter and allows the business to set specific times and working protocols for the employee, but the employee is compensated with certain legal protections regarding the minimum amount they’re paid and what protections to expect.
The client/vendor relationship provides more freedom to the vendor to perform the work according to how they see fit. Though a vendor is responsible for more taxes and loses protections like Workers’ Compensation, the freedom they gain is one of the reasons gig workers are expected to make up over half of the American workforce by 2023.
If the distinction between a W2 employee and 1099 worker is still unclear, consider a situation where a business hires a roofer to fix their building. It’s easier for a business to hire a vendor or independent contractor to repair the roof, give them the freedom to hire their own workers, and complete the job with the tools and supplies they see fit, than it is to keep a roster of roofers as regular W2 employees on payroll indefinitely. If a company’s main job is fixing roofs, however, then the company would benefit from having technicians on the payroll who they can direct to specific worksites at specific times.
Worker Classification and Compliance
The IRS provides a rigorous checklist a hirer can reference to determine if someone should be categorized as a worker or employee, and each state has guidelines to make sure a worker is being paid correctly according to the work they’re performing. A company is “in compliance” when the workers are categorized correctly.
If a company treats their independent contractors like employees but doesn’t fulfil the other obligations required in an employer/employee relationship, then that company has misclassified their workers and can owe thousands of dollars in penalties. To help keep hirers in compliance, Liquid has a free guide to W2 and 1099 classification that breaks down the distinction in further detail.
The Agile Business and the Blended Workforce
At Liquid, we believe that the future of work is a blended workforce: a core full-time team supplemented by a diverse and skilled virtual talent bench. By utilizing both, agile businesses can quickly pivot to accept new opportunities and scale quickly to accommodate growth.
In other words, W2 employees and 1099 contractors each bring unique value to hirers. Full-time W2 employees know your company inside and out and work exactly when you need them to; 1099 independent contractors bring unique and targeted skills to your project without increasing your overhead.
The right combination of the two is a recipe for success.