When engaging in the workforce, it’s important to understand the different types of employment classifications, particularly the distinctions between 1099 and W2. These classifications determine how one is taxed, how employment benefits are handled, and the nature of the relationship between the worker and the employer.
Key Differences Between 1099 and W2
While many people assume that taxes are the determining factor, other aspects also have significant implications for both employee and employer. We’ll explore each of these areas further below.
| 1099 (Independent Contractor) | W2 (Employee) | |
| Control | Sets own schedule, works independently | Employer controls work schedule and process, employee follows employer guidelines |
| Taxes | Responsible for paying all taxes (no automatic withholding) | Employer withholds taxes on employee’s behalf |
| Benefits | No benefits provided; responsible for own health insurance, retirement plan, etc. | Eligible for benefits (e.g., health insurance and retirement plans) |
| Expense Deductions | Can deduct business expenses at tax time | Limited business tax deduction opportunities |
| Pay/Salary | Can often be higher than W2 employee but is usually limited to short-term contracts | Can be lower than 1099 contractor but is more stable |
| Stability | Contract-basis, work can be inconsistent | More job security, steady paycheck |
1099: Independent Contractors
The 1099 classification refers to independent contractors, freelancers, or self-employed individuals who engage in business activities independently. Some key aspects of being a 1099 worker include:
Autonomy and Control
Independent contractors have greater control over how they perform their work. They can choose their hours, methods, and often, their clients. This flexibility is a major draw for many self-employed individuals.
Tax Responsibilities
1099 workers are responsible for handling their own taxes. This includes paying both the employer and employee portions of Social Security and Medicare taxes, usually through quarterly estimated tax payments. At the end of the year, they receive a 1099 form from each client who paid them $600 or more, detailing their income.
Benefits and Expenses
Independent contractors generally do not receive employment benefits such as health insurance, retirement plans, or paid time off. However, they can deduct business-related expenses from their taxable income, including home office costs, travel expenses, and equipment purchases.
Stability
The 1099 contractor works with a company as a vendor on a contract-basis. While this allows a great deal of flexibility—and significant revenue opportunities for contractors who can multitask and handle large workloads—there is also risk of inconsistent work.
W2: Employees
The W2 classification refers to traditional employees who work directly for an employer. Characteristics of being a W2 employee include:
Employer Control
W2 employees typically have less autonomy compared to 1099 workers. They often have set hours, processes, and reporting structures dictated by their employer. The employer controls the manner and means by which the work is completed.
Tax Withholding
For W2 employees, their employer is responsible for withholding income taxes, Social Security, and Medicare taxes from their paycheck. At the end of the year, employees receive a W2 form that summarizes their earnings and the taxes withheld.
Benefits
W2 employees are usually eligible for a range of employment benefits provided by the employer. These can include health insurance, retirement plans, paid vacation, sick leave, and other perks. The employer often covers a portion of the premium costs for benefits like health insurance.
Stability
What the W2 employee gives up in freedom of scheduling, they often make up in stability. Job security—and therefore paychecks—will be much more predictable than the 1099 contractor.
1099 vs W2 Classification FAQs
Can I be both 1099 and W2?
Yes, but often not at the same employer. Many W2 employees also consult or contract on the side as 1099. NOTE: While this is definitely possible, taxes will become much more complex. Green Payroll recommends working with a tax expert in instances like this.
Are there careers that are only 1099 vs. W2?
Many careers can exist as both 1099 and W2 and are used based on employee and employer needs and preferences. That said, there are some careers that are much more common for one or the other. For example:
1099 Independent Contractors – More Flexibility, Multiple Clients
- Freelance/gig work (writers, designers, photographers, consultants)
- Real estate and insurance agents
- Independent tradespeople (plumbers, contractors)
- Entertainers (actors, models, musicians)
W2 Employees – Stricter Industry Oversight for Compliance, More Labor Protections
- Doctors and medical staff
- Government employees (police/fire fighters, postal workers)
- Corporate, office-based work
- Retail and hospitality
- Manufacturing (factories, warehouse distribution)
Both 1099 and W2
Professionals who do the same job can sometimes be classified differently for an employer. For example, a large company might have an in-house graphic designer (a W2 employee) and also hire out some design work to a 1099 graphic design contractor. The core difference is whether the work is ongoing and stable or a “per project” basis.
Which is better, 1099 or W2?
For employees, it depends on your work preferences and financial situation. For those who prefer more flexibility, higher earning potential, and tax write-offs, 1099 might be better. If you value stability and benefits, W2 is a safer choice.
For employers, it depends on business needs, budget, and legal considerations. 1099 provides more opportunity for short-term projects, cost savings, and access to specialized work. W2 employees are better for core business roles, stability, and team integration.
Is 1099 the same as an “exempt” employee?
No! While some people see 1099/W2 and exempt/non-exempt as interchangeable, exemption is an entirely separate type of employee classification. Check out our article on employee exemption status for more detail!
Why Is It Important to Correctly Classify as 1099 or W2?
Misclassification of workers can have serious legal and financial consequences for businesses. These can include:
- Tax penalties and liabilities (possibly including additional interest and non-compliance penalties)
- Wage and labor law violations—leading to potential legal battles, backpay, and more
- Loss of benefits for workers (like employer-sponsored insurance/retirement, PTO, or workers’ compensation)
- Reputation tarnishing and increased scrutiny by government agencies
Choosing Between 1099 and W2
The choice between 1099 and W2 employment depends on various factors such as personal preference, financial situation, and career goals. Some may prefer the flexibility and potential tax benefits of being an independent contractor, while others may value the stability and benefits of traditional employment.
Understanding these classifications is crucial for both workers and employers to ensure compliance with tax laws and to make informed decisions about their work arrangements.
Need Help Deciding Between 1099 and W2? Green Payroll has you covered! Navigating the differences can be complex—especially when handling payroll, taxes, and compliance. Whether you’re an employer hiring both contractors and employees or a worker looking to decide the best classification or your career, we’re here to support you. Contact us today to simplify payroll and compliance!
Further Reading
For more helpful overviews of government forms, check out these articles below:
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