W2 vs. 1099: Employee Classifications in Today’s Workplace Explained

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W2 vs. 1099: Employee Classifications in Today's Workplace Explained

The demand for flexible work and independent contractors increased in the post-pandemic world. According to McKinsey’s research, the US workforce consisted of 61 percent W2 employees and 36 percent independent contractors in 2022.1 However, the number of independent contractors rose to 64 million in 2023 compared to 64 million the previous year.2 

However, even with the growing demand for contractors, the difference between W2 and 1099 employees remains unclear for many businesses and employees themselves. Learning these differences is crucial as it could impact your organization’s compliance obligations. Let’s delve into the complexities of employee classification in today’s workplace.  

 

W2 and 1099: Key Differences 

W2 employees are typical full-time or part-time employees who work as part of an organization. While they have less autonomy and adhere to more complex employment rules, there are key differences and benefits to their employment, like job security, career development plans, and stable income.  

On the other hand, 1099 or independent workers include individuals working on gigs and contract-based projects—often called freelancers or temporary workers. One of contractors’ most prominent characteristics is autonomy over their work, providing services to businesses and clients as external workers. 

Both W2 and 1099 require employers and workers to sign written contracts, perform similar work, and may require the same skill sets for the job. However, these two employment types vary greatly in many ways. Here’s a simple guide that differentiates the two: 

The 1099 Contractors The W2 Employees
More control over their work.
Regular work schedule and shifts, depending on job position and employer negotiations.
Use of own equipment, computers, and internet connection.
Use of employer-provided equipment like laptops, internet, office vehicles, and travel reimbursement.
Employment is project or commission-based and may depend on milestones or hours worked.
Employment is long-term, with consistent payment and continuous demand for work.
May have more than one client with an active contract at a time.
Typically, they work for one employer at a time and rarely work for two.
Works for hourly rates, lump-sum, project rates, or other contractual agreements. Receive a regular wage from their employers.
Does not receive overtime payments. May work overtime.

Read More: Everything You Need to Know About Contract, Contract-To-Hire, and Direct-Hire 

 

W2 vs. 1099 Employment: In-depth Analysis 

While these two employments differ, there’s still a chance for a 1099 worker to have the same perks as W2 employees. At the same time, 1099 workers also follow the same organizational rules as W2 employees.  

Here’s a more detailed comparison between the two employments: 

 

1. Tax Implications 

Employers withhold taxes from W2 employees’ wages for a time, usually a year. Employers then submit the taxes on behalf of the employee annually. However, 1099 contractors are responsible for their tax withholdings, calculation, and submission. Since these two employments have different tax processes, choosing the correct tax forms for compliance is essential. 

 

Tax Calculation 

Other factors that affect the payable tax for both types include an analysis of the pay received, unemployment insurance, and benefits extended, such as health insurance and retirement plans. 

The tax rates for earning $100k W2 vs 1099 are different. For 1099 workers, household income and work expenses from personal savings may affect their rate. It’s worth noting that if ignored, it may affect their performance. 

 

Filling Forms 

For W2 employees, companies must fill out a W-9 form upon hiring, and employees must fill out a W-4 form. During tax submission, companies can file an additional 1099 form for each independent contractor and a W-2 form for each employee.  

 

Misclassification 

If the IRS discovers a misclassified worker, the employer can be held responsible for additional taxes and non-compliance.3 Employees mistakenly classified as 1099 or independent contractors must submit a Determination of Worker Status or form SS-8 to rectify their employment. Furthermore, they may fill out form 8919 to determine and report their share of uncollected Social Security and Medicare taxes. 

 

2. Authority and Autonomy 

Employers direct and manage W2 employees working directly under the company. In contrast, 1099 contractors are considered external partners who extend their services to the company. Because of this, they have more independence and control over their work compared to W2 employees.  

 

Cultural and Organizational Influence 

The organization’s talent management talent strategy significantly affects employers in determining which employment would suit them best and how to classify employees. Permanent employees help mold long-term company culture, while independent contractors can bring new ideas, skills, and concepts in a short time.  

Read More: Harnessing the Potential of Diversity: A Catalyst for Tech Innovation and Progress 

 

Behavioral Control 

The company’s control over when and how the employee works is greater for W2 workers, influencing productivity, discipline, work equipment, work location, daily practices, work processes, and company norms. Unless stated in the contract or agreement, 1099 workers are commonly influenced by work outcomes, economic trends, market demands, and project requirements.  

 

Financial Control 

Another difference is that the employer controls the financial and business aspects of the job, including but not limited to how the worker is paid, whether equipment or travel expenses are reimbursed, and who is responsible for the expense of supplies and equipment required for work. 

 

3. Benefits and Job Security 

Beyond the typical benefits W2 employees enjoy, there are other key benefits they enjoy. However, W2 employees are more costly to employ than 1099 contractors. Usually, companies manage tax deductions along with additional fees like: 

  • Software subscriptions 
  • Consultation services 
  • Accounting services 
  • Legal consultation 
  • Compliance costs 
  • Penalties  

 

Businesses handle their income and payroll taxes like Social Security and Medicare, which may include 401k matching. On the other hand, contractors would have to manage these on their own.  

On the other hand, 1099 workers demand a higher wage rate because legal obligations bind them to prepare for unemployment and compensation insurance. Through a higher wage offer, 1099 workers can get fractional coverage for their legal obligations. Compared to the overall cost of employing W2 workers, 1099 may still be a less expensive option despite the higher wage rate.  

You may choose to pay for benefits such as paid time off and health insurance to 1099 workers if you are looking to hire more competent workers to work with you. Hiring top talent from the independent contractor pool requires greater funds and attractions, which may lead to the cost being the same or higher even for W2 employees in some cases. 

Read More: 2023 Priorities: Tips for Company Culture Leaders to Retain and Attract Employees 

 

4. Misclassification 

Companies easily confuse W2 employees and 1099 contractors as they both work under an employer, perform similar tasks, and may have the same sets of skills. However, this can cause misclassification and incur legal penalties to the employer. In some states, it’s not even possible to register employees as 1099 if they have benefits in their contract.  

 

Avoiding Legal Implications 

There are even times when employees use a different tax calculator to see which type would benefit them more, thinking there would be no consequences. However, this dramatically affects their status and will have legal impacts.  

As an employer, it’s your responsibility to maintain accuracy. To best manage your workforce, you may hire contractors for short-term roles that demand flexibility. In case you need to, you can always make them full-time employees and train them further. 

 

Laws and Regulations 

Some federal employment laws that affect the hiring process include the Fair Labor Standards Act (FLSA) and the Family and Medical Leave Act (FMLA). Then, there are State and local laws to be looked at as well.  

Some states like Virginia, Iowa, and California require additional rules for both W2 and 1099 employees. These states require additional non-compliance penalties and additional documents for processing.  

 

Choosing Between the Two 

Employees appreciate flexibility and autonomy. However, they also look for job security and safety to maintain a source of income for themselves and their families. People have different preferences as to why they choose regular 9-5 work or contractual employment. It could be employee benefits, competitive pay, job security, job flexibility, tax responsibilities, or the ability to work multiple jobs. Depending on one’s circumstances, W2 and 1099 will always have their place in the workplace.  

As an employer, there’s no better option between the two as they both provide benefits and challenges. In the end, it will be up to your preferences and organizational goals which of the two you should prioritize. If you prefer long-term commitment, culture-add, and job continuity, hiring W2 employees may work best. However, if you’re looking for employees for short-term projects that need additional knowledge and skill sets to accomplish, 1099 or contract workers should suit you better.  

Read More: Is Offshoring the Workforce Solution You’ve Been Waiting For? 

 

FIND W2 OR 1099 EMPLOYEES WITH STRATEGIC SYSTEMS 

Invest in qualified full-time or contractual employees with a staffing firm.  

With Strategic Systems, you’ll have access to exceptional talent, and we’ll look for ways to provide solutions to your unique needs. With our vast talent pool, find the best fit and improve your company’s performance and growth. 

Get in touch with us today and learn more about our services and solutions! 

 

References 

  1. “Freelance, side hustles, and gigs: Many more Americans have become independent workers.” Mckinsey & Company, 23 Aug. 2022, www.mckinsey.com/freelance-side-hustles-and-gigs-many-more-americans-have-become-independent-workers. 
  2. Upwork Study Finds 64 Million Americans Freelanced in 2023.” Upwork Investors, 12 Dec. 2023, https://investors.upwork.com/news-releases/news-release-details/upwork-study-finds-64-million-americans-freelanced-2023-adding  
  3. “Worker Classification 101: employee or independent contractor.” IRS, 2 Aug. 2022, www.irs.gov/worker-classification-101-employee-or-independent-contractor.