The Differences Between 1099 and W-2 Employees

n 2024, there were 72.7 million independent workers in the United States.
With independent contractors on the rise, you may soon need to file taxes a little differently this spring. Even if you understand that the 1099 tax form is used to report payments made to an independent contractor, and a W-2 is used to report employee payments, understanding how to classify them can be overwhelming.

First, let’s quickly review the legal differences between an independent contractor and a full-time employee.

Comparing 1099 Workers vs. W-2 Employees

In the chart below, you can see the major aspects that sets 1099 workers a part from W-2 employees:

In the chart below, you can see the legal criteria that set 1099 workers apart from W-2 employees.

Let’s dive deeper into some of the more day-to-day differences that will help you correctly classify your workers.

Key Differences Between 1099 Contractors and W-2 Employees

An independent contractor isn’t a full-time employee. They’re usually hired on a project-to-project basis or to accomplish tasks in a certain timeframe, but work independently of the business.

They’re responsible for providing tools and supplies for the job, and that employers can’t control how and where the contractor works. When hiring independent contractors, businesses and contractors must agree to a written agreement.

A full-time employee on the other hand, shows up at office or an agreed-upon location and works on ongoing tasks. Employers have control over where, how, and when employees complete their work, and must also withhold taxes for benefits such as Social Security, health care, and so on.

How does the IRS determine who is a 1099 worker vs a W2 Employee?

To help businesses correctly classify and identify 1099 employee requirements, the IRS created a list of questions that can determine the worker’s relationship to the company. Broadly, these help employers understand how much control they have over the worker’s independence.

The questions include a few aspects:

1. Behavioral: Who directs how the work is completed?
2. Financial: Who provides the tools and controls the business aspects?
3. Type of Relationship: Is the arrangement an ongoing employment with benefits?

Any business needs to carefully answer these questions when submitting global payroll, as an incorrect tax form could lead to serious penalties and misclassification. Penalties can include steep fines for any violations of tax codes, and misclassification can result in lawsuits and potentially, damage their reputation, making it harder to attract top talent.

If you’re unsure how to classify an employee, you can fill out an SS-8 form and send it to the IRS to help determine whether a worker is a 1099 or a W-2 employee.

What is a 1099 employee?

A 1099 employee is a misnomer: they’re contractors, not full-time employees. Also called freelancers, self-employed workers, or independent contractors, 1099 workers file their own income taxes to the IRS each year.

Since 1099 workers work for themselves, they may have several clients typically charge per project. 1099 contractors often charge per project. Examples of 1099 workers include:

• Freelance writers who work on an assignment basis, without set hours
• Consultants who help your company for a clear start and end date
• Gig workers who perform services receive payment through an app
• Freelance designers and developers who project by project

Differentiating independent contractors from international contractors

An independent contractor is a self-employed individual who provides services to a client or company and usually works within the country they operate. An international contractor operates beyond national borders, conducting business across multiple countries.

International contractors often handle large-scale projects or ventures, requiring specialized expertise and a deeper understanding of cross-cultural and international legal intricacies. While both play significant roles in today’s globalized economy, their distinct scopes and operational environments distinguish them as unique contributors to the workforce.

No matter their industry, project, or experience-level, every type of 1099 worker needs to fill out a 1099 tax form.

What is a W-2 employee?

W-2 employees come to work each day, fill a specific role, and receive a weekly or monthly salary. While 1099 contractors work contract to contract, W-2 employees sign an agreement, for an indefinite period of ongoing work.

Employers can control workload, scope, and hours of full-time employees. Employees are also entitled to benefits such as Social Security and Medicare, which businesses withhold on the W-2 forms.

Examples of W-2 Employees

W-2 workers are often easier to identify and include:

• Hourly employees in labor or customer service roles
• Salaried employees who finish daily tasks for the organization
• Executives and management within the organization

Who Should Fill Out Which Tax Form?

Businesses usually fill out and file 1099 forms and submit them by January 31st, while employees fill out W-2 forms. Here’s a detailed look at each 1099 form.

1099 tax form

Depending on the contractor’s status, there are different types of 1099 employee forms:

1. Form 1099– ​​These are documents businesses use to report payments made to an independent contractor over the last year.
2. Form 1099-MISC: Miscellaneous Income – Records payments to independent contractors of $600 or more per year who own real estate or buy supplies for clients.
3. Businesses must fill out a form to send to the IRS (sometimes called Copy A), and send the contractor a copy (called Copy B)
4. Form 1096 – This form is a summary of all of the 1099s you filled out and sent to the IRS by the last day in January.
5. Form 1099-NEC: The IRS requires this form if the work involves non-employee compensation (e.g. independent contractors).

IRS Tax Form 1096

Form 1096 summarizes non-employee compensation tax forms, such as Form 1099-NEC for contractor payments and reports things like:

• Contractor payments
• Rent
• Collected mortgage
• Dividends

When filing several return forms, businesses need to file a 1096 for each type of compensation.
Any business reporting non-employee compensation must also send Form 1096 to report payments of $600 or more to contractors during a calendar year.

W-2 tax form

If you’ve hired a W-2 employee whether part-time or full-time,, your business will submit a W-2 tax form. The W-2 records of an employee’s compensation, benefits, and taxes withheld for a single tax year.

Employers have until January 31st of the following calendar year to file W-2s for their employees.

Businesses must file W-2s for any employee paid $600 or over for the year. Employees must withhold a portion of Social Security and Medicare taxes from employees’ salaries and must pay a matching amount.

Advantages and disadvantages of hiring a 1099 employee

Each employee has a different relationship with the employer, each with their own benefits and drawbacks. Let’s start with the advantages.

Advantages

• Contractors come with specific expertise – Single, non-recurring projects may needs specific expertise for short periods of time.
• 1099 employees don’t need monitoring – Contractors create their own schedule, submitting the final result as per contract while teams can focus on other tasks.
• Businesses save on taxes – independent contractors file their own individual income taxes, helping companies save on benefits.
• You can end the partnership whenever you want – you can hire and let contractors go as needed, as long as you abide by the agreed-upon contract.

Disadvantages

• Businesses have less control – Contractors may have several clients, so they may not be available during the hours you need.
• There’s a potential lack of loyalty – If contractors work on several projects for multiple companies, they may feel less loyal to one specific company.
• Risk of misclassification – Labor laws in the United States watch for companies that misclassify workers as independent contractors. If you misclassify a worker, your company could face fines, penalties, and back taxes.

Which type of worker should you employ?

Whether a W-2 employee or an independent contractor, both can bring value to your business. When deciding between the two, it’s helpful to consider:

• Is this ongoing work that will continuously impact the company or a short-term project for a pre-defined period of time?
• How urgent is the need? -Do you have an employee who fits the team culture and has the necessary skills? Or can you hire a self-employed contractor while you look for the perfect fit?
• How much would you need to pay the new hire? Is it more beneficial for the company to save on salary and benefits and go with an independent contractor or freelancer?

Of course, there are also other considerations. If it’s important to your business that workers focus on pre-approved tasks and complete the work a certain way during a specific number of hours, you may want to opt for a W-2 employee.

An executive for instance typically falls under a W-2 employee. But for non-leadership roles, an experienced contractor who brings the necessary skills to a project can help you achieve more at faster rates.

As with any important business decision, weighing the pros and cons can help you make the right choice. With that, let’s take a closer look at hiring 1099 employees.

Navigating classification with Papaya Global

Misclassification is one of the most common mishaps companies can fall into when hiring contractors. Errors like these can lead to major financial consequences.

With Papaya Global, our boots-on-the-ground legal experts are with you every step of the way to ensure your workers are ALWAYS classified correctly – no matter where they’re located.

Book a demo to learn more.