1099 vs W2 Employees – Which is Better?

Cody Cromwell
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Summary of a 1099 Contractor vs W2 Employee

After completing a detailed and thorough research over various sites and forums, I’ve come up with the following.

In general, 1099 Contractors tend to have more flexibility with their working hours and can also work for multiple clients at the same time. W2 employees tend to be more responsible for bill paying, filing them, and keeping a closer eye on all their taxes. They also have fewer benefits.

The difference between 1099 Contractors and W2 employees often comes down to their approach to their work. W2 employees think of their jobs as permanent jobs where they have to give their work undivided attention and time. They also feel the need to complete the work assigned to them to the best of their abilities.

1099 Contractors work as hard as they have to to finish the work on hand and avoid the tasks given to them that they are completely uninterested in or find too challenging to complete. The main advantage of 1099 Contractors is that they can charge their clients for the time and energy spent on their job. They can even take advantage of additional time spent on other activities to earn money working at other jobs.

1099 vs W2 Workers: The Differences

Employees with 1099 status are independent contractors and are not treated as employees for tax purposes. As an independent contractor, a 1099 worker is not eligible for benefits, reimbursements, and you do not need to pay Social Security, taxes, or worker’s compensation.

If you have ever worked freelance or had a contract company managing your social media presence, you have likely interacted with at least one 1099 professional. This is the most common type of contractor that you will see.

While 1099 contractors have their benefits, they also come with a cost. Namely, 1099 contractors are responsible for all payroll tax and fines related to their payroll. Without a W-2, they have to track and report their income to state unemployment applications, and provide proof of earnings to the IRS.

Tax rules do not allow the counting of contract workers whom you are not paying a wage for services performed (i.e. a 1099 contractor). This means that a 1099 contractor you doing work for you, you do not need to pay them for Social Security, Medicare, or income taxes.

Payroll Taxes

Each individual who performs services for a company is known as an independent contractor (See the IRS-1099). So you’re probably wondering, what’s the difference between independent contractors and wage employees?

Statistically speaking, these two types of workers have much in common. Both are busy, productive, and responsible with their time. If you own your own business or are part of a business that depends on independent contractors, you’re already well aware of how significant a role independent contractors play in a business’s day to day operations.

The first thing that strikes many people about independent contractors is their financial independence. Whether you’re a solo entrepreneur, a small business owner, or own a larger enterprise, you’ll require the help of independent contractors to get things done.

But there are some important differences between independent contractors and salaried wage employees. First, independent contractors are responsible for paying their own payroll taxes, whereas wage employees don’t. All expenses, including payroll taxes, are borne by the company, so it’s in the employer’s best interest to review their relationship with independent contractors, along with the ins and outs of the payroll tax process.

Federal Labor Law Protection

You are an employee of an independent contractor – sometimes referred to as a 1099 employee – if you do not have an ongoing employee/employer relationship with your client or employer. However, there are a number of benefits to being a traditional, W2 employee, including greater company protection in the event of layoffs, possible retirement and health benefits, protection against discrimination claims and, according to the U.S. Department of Labor, greater opportunities to earn overtime.

A 1099 employee is defined as any independent contractor or subcontractor who is paid by a third party. According to the IRS, an independent contractor is a business person who performs work or services for which he or she does not provide any direct supervision, advice or guidance to an employee, client or customer.

The independent contractor-employee relationship is typically less formal than a W2 relationship, and the employee does not have access to the same benefits and protections as a standard employee. However, the IRS still offers certain protections to both employers and employees. Although there are limited protections for independent contractors, there are tax penalties for employers who misclassify employees as independent contractors.

According to U.S. Department of Labor, one way the IRS determines that a self-employed individual is an employee versus an independent contractor is through the use of the control test.

Paychecks & Benefits

You’ll have to pay the usual tax, too. You’ll want to factor in any employee benefits you’ve already offered to pay for yourself. Consider what you’ve paid for your employees’ benefits, and factor those into the equation.

If you’re paying for healthcare, you’re likely to set your employees up under the business’s W2 tax system, not as 1099 independent contractors. This makes it easier to readjust your withholding as you or your employees change jobs.

Also, it’s likely that you’ll pay into the federal payroll tax and Medicare, which may be less than you’d pay if you had used 1099.

1099 contractors pay social security and income taxes on their own. So, if you’re able to cover those two, consider 1099 contractors for one-time needs. They may be ideal for short-term janitorial work, or they could help you fit your work around your free time.

Independent Contractors vs Employees: 1099 or W2?

Independent contractors are those who are hired by an outside party to complete a specific task or deliver a specific service. They are not employees. Being an independent contractor does not make you an independent business owner,

Independents are independent of both the employer as well as the business. Freelancers, also known as independent contractors, can file their own taxes and are not subject to payroll taxes. The W2 however is used by employers to withhold taxes from wages for employees, and pension, social security, and medical contributions.

Generally independent contractors have more freedom than employees in terms of working hours, payment, and other things. On the other hand, they have more risks and must bear responsibility for themselves.

There are advantages and disadvantages to both W2 and 1099 employees.

Advantages to W2

W2 employees are liable for taxes just like employees but with a major difference – W2 employees are NOT responsible for things such as payroll taxes, social security, etc.

W2 employees pay taxes and other expenses related to employment, like FICA, taxes, and workman’s compensation insurance. But employers take care of these taxes. Independent contractors are responsible for taxes and expenses themselves.

1099 Advantages for Employers

The U.S. Internal Revenue Service (IRS) hires both the 1099 and the W-2 employee. A business uses either one or both of these employee records to report the taxes on income derived from their business activities.

Companies which have employees earn a income and pay taxes. Companies have the choice of having their employees file workman compensation and/or pay taxes with a 1099 or W-2. The decision of which to use on each worker is determined by the individual business. Many people are not aware that there is a difference between the 1099 and the W-2 when it comes to tax issues. That’s just one reason why a business should educate people on the differences between the two. Employees who work for a business, not an individual, receive a 1099 if they work at 1099 status.

Some 1099 workers are paid in cash. The 1099 worker receives payment in cash. In this case, the 1099 worker does not receive a W-2. The business does not withhold taxes with a 1099 form and does not send a W-2 form to the IRS.

1099 Disadvantages for Employers

1099 vs W2 Employment: does it matter which type of employee you hire?: 1099 vs. W2 Employees

1099 vs W2 Employment: does it matter which type of employee you hire?

Many small business owners, and even some large businesses, use independent contractors rather than paying the higher W2 payroll tax.

An independent contractor is one who provides their services as a business owner, and are subject to the tax requirements applicable to that status. Generally, they may consider themselves an independent contractor depending on the circumstances. A contractor independent of their business entity, the IRS, and the customers.

Independent Contractors save the employer from:

State employment taxes-although there is a federal tax for non-payment of state employment taxes.

State unemployment insurance, workers compensation, and payroll taxes-but it is still the employer’s responsibility to track payments and make all payments to those respective agencies.

Local business licenses, fees, and so forth.

Federal employment taxes, with certain exceptions.

Excess retirement contributions, and an employee’s contributions into their Thrift Savings Plan.

W2 Advantages for Employers

Any company that has employees must manage their payroll account. This seems to be a pretty basic task that companies should be able to handle without a problem … and in most cases, they can do it themselves. However, each company setup is very different. There are so many different payroll systems on the market, and there are a lot of factors that can affect the process.

Tax laws are always changing. With the new healthcare reform law, there’s been a massive shift in employer responsibilities. And many companies have opted for a tax prep solution to shorten the amount of time it takes to receive an accurate tax report. So now the standard payroll service doesn’t satisfy the companies’ needs, and they need to use something different. They want to be able to customize the process to meet their company’s specific needs.

With the right solution in place, employers are sure to make a more streamlined, efficient accounting system. 1099 vs W2 is a great solution for companies to handle this type of account.

W2 Employee Disadvantages for Employers

The Fair Labor Standards Act (FLSA) has created a system of employment that makes it easier for employees to purchase goods, services and goods. As an employer, it will be more difficult for you to satisfy the requirements that are outlined in the Act if you employ W2 employees.

Before you begin your search for a company that will provide you with the services that your business needs, there are two questions that you should ask yourself. What are you looking for in an employee? Do you want a W2 employee or a 1099 employee? We will take a closer look at each of these positions and there will be a few things that you can do to avoid being taken advantage of in both positions.

Bottom Line

While both of these forms of business structures are legitimate, there are some differences that might benefit you if you decide to opt for one or the other.

Read on to learn about the advantages of a 1099 independent contractor vs. a W2 employee.