1099 vs W2: What’s the Difference and Why It Matters

The workforce dynamism of the 21st century has enabled businesses to form lean and agile teams for better productivity. 

Taking advantage of it, you can choose to hire a 1099 vs W2 worker type in the US. 

The pros and cons of 1099 vs W2 are based on tax responsibilities, compliance requirements, and the structure of the working relationship. 

There could be instances where a worker is misclassified based on behavioral or financial control or other factors. You must be diligent, as misclassification can lead to hefty fines and operational inefficiencies.

This guide breaks down the key differences, tax implications, and decision-making tips to help you choose the best option for your business—W2 vs 1099.

What is a 1099 vs a W2?

The difference between 1099 and W2 employees hinges on the nature of control you can command in the working relationship. 

While 1099 contractors operate independently, the W2 employees are under your supervision. 

These distinctions under W 2 vs 1099 affect your tax obligations, compliance requirements, and overall HR cost structure. 

Let’s learn more about their key characteristics and how they can benefit your workforce. 

W2 Employees: Key Characteristics

W2 employees bring stability and control to your workforce. 

The major W2 employee requirements that define their characteristics are listed below: 

• You must pay them regular wage or salary.
• You must provide statutory W2 employee benefits such as health insurance, retirement plans, and paid time off.
• You must withhold a pre-determined share of salary payments for Social Security, Medicare (FICA), and federal/state taxes.
• You must also contribute to unemployment insurance and other statutory benefits for W2 employees.

1099 Independent Contractors: Key Characteristics

Unlike regular employees, 1099 contractors give you specialized services without spending on additional training costs. 

Usually, they are sole proprietors but can also be considered a freelancer. They are most resourceful when dealing with short-term projects.

Here are some key features that differentiate W2 employees vs 1099:

• You can assign work, but you may not have full control over when, where, and how they work.
• Typically, you cannot bind them to work exclusively for you. They work with multiple clients simultaneously.
• You do not have any tax withholding liabilities. They are responsible for their tax payments, including self-employment tax.

What is the Difference Between W2 and 1099?

The authorities usually rely on the following tests for W2 vs 1099 to determine the actual status of the worker and if misclassification is applicable retroactively:

When in doubt, the safest course is to classify a worker as a W-2 employee or request an IRS determination via Form SS-8.

W2 vs 1099: Tax Implications

The tax obligations differ significantly for W2 vs 1099:

• W2 Employees: You must withhold income taxes and contribute to FICA and unemployment insurance.
• 1099 Contractors: You must report payments made over $600 using the 1099-NEC form but don’t handle tax withholdings. 

While W2 employees use W2 forms to report their earnings, 1099 contractors independently manage quarterly estimated tax payments and deductions. 

Here’s a summary of IRS tax forms required for reporting & compliance:

Filing Taxes for W2 Employees

You can follow the below steps to file taxes for regular or remote W2 employees:

1. Obtain an Employer Identification Number (EIN):
   • Register for an EIN with the IRS to identify your business for tax purposes.
2. Classify the Worker as a W-2 Employee:
   • Ensure the worker meets the criteria for a W-2 employee (behavioral and financial control, type of relationship).
3. Collect Form W-4 from the Employee:
   • Have employees complete Form W-4 to determine their federal income tax withholding preferences.
4. Set Up Payroll:
   • Use payroll software or a service provider to calculate wages, taxes, and deductions (federal income tax, FICA, and state/local taxes).
5. Withhold Taxes:
   • Deduct the following from each paycheck:
     • Federal income tax
     • Social Security (6.2%)
     • Medicare (1.45%)
     • State and local taxes (if applicable).
6. Pay Employer Tax Contributions:
   • Match the employee's Social Security and Medicare taxes.
   • Pay federal and state unemployment taxes (FUTA/SUTA).
7. File and Submit Payroll Taxes:
   • Submit withheld taxes to the IRS and state agencies (typically bi-weekly or monthly).
   • File Form 941 (Quarterly Federal Tax Return) or Form 944 (Annual Federal Tax Return) with the IRS.
8. Issue Form W-2 to Employees:
   • Provide employees with Form W-2, summarizing their earnings and withheld taxes for the previous year, by January 31 each year.
   • File W-2 copies with the Social Security Administration (SSA). 

The major W2 and 1099 difference when comparing 1099 taxes vs W2 taxes is that contractors are responsible for most compliance. Learn more about tax forms for independent contractors for compliance. 

Filing Taxes for 1099 Contractors

You can follow the below steps to fill taxes for 1099 contractors: 

1. Classify the Worker as an Independent Contractor:
   • Ensure the worker meets the criteria for a 1099 contractor (limited behavioral/financial control and independent work relationship).
2. Collect Form W-9 from the Contractor:
   • Request contractors complete Form W-9 to provide their Taxpayer Identification Number (TIN) and other details.
3. Track Payments to Contractors:
   • Keep records of payments exceeding $600 in a calendar year, as these require reporting to the IRS.
4. Issue Form 1099-NEC:
   • By January 31, issue Form 1099-NEC to contractors and the IRS, reporting total payments made to the contractor.
5. File Form 1099-NEC with the IRS:
   • Submit 1099-NEC forms electronically or by mail to the IRS, including Form 1096 if filing by mail.

Is a 1099-NEC the same as a W2 form?

No, 1099 NEC and W2 forms serve different purposes and apply to distinct worker classes. Here’s a quick summary of W2 form vs 1099:

Pros and Cons of 1099 vs. W2

Here’s a comparison of the pros and cons of hiring 1099 contractors versus W-2 employees:

Benefits of hiring W2 employees

• Greater control over work schedules and processes.
• Stability and long-term commitment.
• Access to a dedicated workforce.

Benefits of hiring 1099 contractors

• Cost savings, as businesses don’t pay for benefits or payroll taxes.
• Flexibility for short-term or specialized tasks.
• Access to a broader talent pool.

How to Decide Between W2 and 1099 for Your Business

Here’s a quick summary table to decide between 1099 vs W2 employees:

Converting a 1099 worker to a W2 employee

You can convert 1099 to W2 employees for better control over their work schedule and long-term commitment. The best way to go about this is by following three simple steps: 

1. Update contracts and agreements.
2. Register for payroll taxes and set up tax withholdings.
3. Provide the necessary benefits and ensure compliance with labor laws.

You can refer to our detailed guide on switching workers from 1099 to W2. 

How to File 1099 and W2 Together

You may need to file both forms if you employ a mix of W2 employees and 1099 contractors. Additionally, there may be situations where you convert 1099 to W2 employees. For instance, you hired a contractor for a specific tech deployment but later got the same worker full-time based on your evolving workforce requirement.  

In any case, you have to file 1099 and W2 forms together. Here’s how to go about it: 

1. Prepare W-2 Forms for employees
2. Prepare 1099 Forms for contractors
3. Ensure correct deadlines. Usually, it is January 31st
4. Maintain records

Alternatively, use payroll software or EOR services to ensure accurate reporting and compliance.

Simplify Hiring and Managing Talent with Skuad

Skuad simplifies the complexities of managing a global workforce by helping businesses easily hire, pay, and manage W-2 employees and 1099 contractors in over 160 countries. 

Whether hiring full-time employees or independent contractors, Skuad automates tax filings, generates the necessary forms (W-2 and 1099), handles cross-border payments in multiple currencies, and converts 1099 to W2 employees. 

This eliminates the administrative burden, reduces non-compliance risk, and allows businesses to scale their workforce efficiently across different countries.

‍Book a demo today to learn more use cases that suit your business interests.

FAQs

1) Should a Business File W-2 and 1099 Separately?

Yes, businesses managing a pool of W-2 employees and 1099 contractors are advised to file taxes separately. Third-party HR payroll services like Skuad can help manage W2 and 1099 workers seamlessly. 

2) What Is the Tax Rate for 1099 vs. W-2?

The tax rate for W-2 vs 1099 includes employer contributions to Social Security tax (6.2%), medicare tax (1.45%), state unemployment tax, and federal unemployment tax (0.6%-6%). You have no tax obligations towards 1099 contractors. They are responsible for their tax.  

3) Why Is It Necessary to Have a W-2 or 1099?

To maintain a stable yet agile workforce, you should have a pool of W2 employees and 1099 contractors. While W2 employees are committed to the long-term, you can access specialized skills for short-term projects without investing in employee training by hiring 1099 contractors.