The terms 1099 and W2 refer to two things—a type of tax form and a type of employment. It’s important to understand the distinction between these two tax forms and employment types for many reasons.
Employers and employees can run into difficulties if these distinctions aren’t made clear. In some instances, businesses and workers can get into trouble with the IRS if they don’t have these roles clearly defined.
Independent Contractor vs Employee
One very common name for self-employed workers or people who own a small business is independent contractor. “Independent” means that these people work for themselves and “contractor” means that they usually work with other businesses under a contract.
Meanwhile the term “employee” or “W2 employee” is the name commonly used for anyone under traditional employment with an employer.
What is an Independent Contractor?
Independent contractors are considered to be self-employed. This type of worker enters into a contract with their clients to provide some kind of service, often for a designated amount of time.
The contract will outline things like what work will be done, when it will be done, how it will be done, and how much the client will pay the independent contractor. These terms are outlined by the contractor and agreed upon by the client.
Independent contractors might even decide to hire other contractors to help them finish the projects they get from their clients.
What is a Traditional Employee?
Employees, or W2 employees, are traditional workers. They are not self-employed and are hired as a regular worker for the company that hires them. W2 employees are usually hired on a full or part-time basis and are paid a consistent salary on a weekly, monthly, or yearly basis.
Because W2 employees are not their own business owners, they are subject to the demands, needs, and work structure of their employer. A W2 employer generally has more say over how, when, and where a W2 employee works.
What are the Pros and Cons?
Independent contractors and W2 employees both enjoy many pros and have to handle many cons. In short, W2 workers don’t have to worry about handling a lot of the management work that goes into doing their job, while 1099 workers have to manage everything themselves.
The Pros and Cons to W2 Work
W2 workers enjoy benefits like insurance, employee health programs, bonuses, dependable pay, and dependable hours.
Employers of W2 workers also generally take care of their employees income tax in payroll, so W2 workers only have to worry about getting their W2 tax form from their employer when tax season comes around.
W2 Employers also provide all the necessary tools, workspace, and software necessary for their employees to do their jobs.
But W2 workers are subject to the bosses they work under who decide things like how much they make, where they work, the hours they work, etc.
The Pros and Cons to 1099 Work
Independent contractors on the other hand, get most of the say for how, when, and where they work. They also decide their own rates and fees and outline the work contract they want to use with clients themselves. They are their own bosses and only have to answer to themselves.
But they do have to handle a lot more of the managerial side of work themselves. If they need supplies, tools, software, or a workspace then they have to take care of that themselves.
Freelance work and contracting work can also be less dependable with pay and hours. You are in charge of finding your own clients and selling your services to them.
For these reasons independent workers can end up wearing a lot of different hats within their small business, adding to their overall workload.
1099 vs W2 Employees
There are many classifications for different types of employment. As a worker or employer, it’s important to know what kind of worker you or your employees are.
This will help keep you safe from liabilities, help you understand what you are and aren’t responsible for, and help you know how to handle your tax filing and IRS paperwork.
Am I a 1099 Employee?
1099 employees are workers who are self-employed. The term “self-employed” can be a tricky term to understand because many self-employed workers get hired to work for their clients. But this business relationship is different then if you nailed a job interview and got hired as a full or part-time employee for a company.
If you aren’t sure if you count as “self-employed” then ask yourself the following questions:
- Does the employer control what, where, how, and when you work or is that mostly up to you?
- Does the employer control the financial aspects of your job like how, when, and what you get paid or is that mostly up to you?
- Does the employer provide you with any employee benefits like insurance and paid time off or is all of that mostly up to you?
If you answered “yes” to these questions then you are probably self-employed and considered a 1099 employee by the IRS and the businesses that hire your services.
Am I a W2 Employee?
On the other hand, W2 employees would answer “no” to these questions. Their employer would mostly be in charge of things like what, where, how, and when you work, how, when, and what you get paid, and any employee benefits they choose to provide.
W2 employers are also responsible for handling the income tax of their employees. When someone starts a new job they’ll fill out a W4 tax form. This form tells your employer how to pay your income tax from your paychecks and if you want to use any withholdings.
1099 vs W2 Tax Forms
If you’re still finding it confusing though, you can always hire a tax professional from Check City’s tax services to take care of your tax filing for you. Check City even offers a faster tax refund with the Check City Tax Refund Advance.
The same difference applies to 1099 vs W2 tax forms as the ones outlined in the previous section. Which tax form you need to file taxes each year will depend on the kind of employee classification you fall under.
What Tax Form Do Independent Contractors Use?
Self-employed workers will need to use a 1099 tax form to file their taxes. Contracted workers also need to make sure they fill out a 1099 form with each employer they work with throughout the year.
Many small business owners or contracted workers end up working for multiple employers throughout the year. They’ll need a 1099 form for each one.
Independent contractors may also need to remember to fill out W4 forms with each employer to take care of their income taxes.
What Tax Form Do W2 Employees Use?
Because independent contractors work for themselves, they are in charge of managing all their tax documents related to the work they do for each client in order to finish their tax return each year.
W2 employees have this part a little easier because the employers they work under handle most of this. They just need to receive a W2 tax form at the beginning of each year and use that document to file their taxes for the year.
There are many reasons to choose being a W2 worker over an independent contractor and there are many reasons to choose being an independent contractor over a W2 worker.
Which employment classification you choose is entirely up to you and your individual work preferences.
Just remember that depending on your type of work your personal tax prep checklist might look different.
As a regular employee you’ll need to look out for your W2 tax form each year to file taxes, and as a self-employed worker you’ll need to take the initiative to fill out W4 and 1099 tax forms with each client or business you work with to file taxes.