In today’s workforce, understanding the differences between working as an employee vs independent contractor is more than just IRS lingo. It’s a crucial part of how businesses function and how workers file their taxes before April 15th of each year.
Whether you’re an employer deciding if you should hire W2 employees or outsource to independent contractors, or trying to figure out which types of workers receive which document, knowing the differences between a W2 employee and a 1099 independent contractor is vital in how you move forward.
Read on for information on W2s, 1099s, and the differences between them. This will give you the knowledge you need to succeed when it comes time for taxes.
What is a W2?
A W2 is a form that the IRS requires employers to keep for documentation purposes. It supplies the employee and the IRS with wage information, federal withholding amounts, and state and other taxes that are taken out of your paycheck. This document also shows amounts withheld for employer benefits like health insurance, health savings account contributions, and other vital information.
You will receive a W2 (not to be confused with a W4) whether you’re a full-time employee or a part-time employee.
Information included on a W2 will be
- Employer Identification Number
- Employer Address
- Wages (including tips)
- Health Insurance Contributions
- Federal Witholding Taxes and State Taxes
- Any Contributions Made To Retirement Accounts
What is a 1099?
A 1099 is a document that supplies information about wages earned that are not from a typical employer. There are a few different types of 1099 forms and which you receive is dependent on what the wages you earned were for.
For example, if you earned wages from someone who is not an employer for services you provided, you’ll receive a 1099-NEC.
If your money earned comes from something like royalties from an investment property you’ll receive a 1099-MISC.
For a person who receives a 1099, you’re essentially taxed with your portion of taxes plus whatever a typical employer would pay on your behalf.
It’s important to know that if you received more than $600 in payments you will be receiving a 1099 to file your taxes.
W2 vs 1099 Employees – Key Differences
For most jobs you’ll know upfront whether you’ll be a W2 employee or a 1099 independent contractor because there are some key differences.
The behavioral control aspects between W2 and 1099 employees are completely different. If you have a boss, schedule, and all of your supplies that you need to perform your job are provided for you, then you’re likely a W2 employee. A 1099 contractor won’t really have a boss (a lot of times they are their own boss) and will set their own hours. They are also responsible for buying their own supplies that they need for their gig.
Another key difference is financial control. If your job controls how much you make and how much you’re paid (whether you can negotiate or not) then you’re considered a W2 employee. Contractors will set their own wages and choose how they’re paid.
Lastly, the type of relationship you have with a business helps to distinguish between W2 vs 1099 employees. If a business offers a health care plan or provides paid time off, you will likely be classified as an employee and receive a W2. If you receive a 1099 then you most likely have to pay for your own private health care and don’t get paid if you take time off.
Similarities Between 1099 vs W2 Employees
Despite their differences, you are also able to find some similarities between these two types of classifications as well. They are
- Claiming Dependents – Both types of forms have the ability to claim dependents if they have them. This offsets the amount you owe back in taxes
- Standard Deductions – For either type of form, there is the choice to claim the standard deduction.
- Wages – On both forms, wages will be visible and are vital to filing your taxes properly.
Examples of W2 Employees vs 1099 Independent Contractors
As we said above, you’ll know going into a job whether you’re an employee or gig worker but sometimes people confuse the two.
Some examples of W2 employees are
- Grocery store clerk – They have set hours and wages
- Office employees – They have a dress code, set hours, and set wages.
- Manager – They may be the boss but they still have a code, hours, and wages
Some examples of 1099 workers are
- Painter – if they are contracted out and own their own business they are considered an independent contractor.
- Artist – Someone who is commissioned to create something and they set their own prices would receive a 1099 at the end of the year.
- HandyMan – If you hire someone to come to your home to do a job and they are a small business that sets their own hours and prices, they too are a 1099 worker.
- Uber Driver – They pick which hours they choose to work and use their own vehicle.
Your Classification Shouldn’t Confuse You
Whether you’re employed at your dream job or running your own successful business, taxes can be confusing. Navigating the complexities between W2 vs 1099 employees is vital for both businesses and workers. The way someone is classified has profound implications for their tax responsibilities. Employers must also be aware of these differences so that they are not outsourcing to independent contractors when they really should be classified as employees.
As traditional employment continues to evolve, with gig work being a mainstay in our society it’s important to understand the differences between these classifications so that you’re always given what you deserve.
We always recommend consulting with a tax professional for any questions about your classification or tax preparations. At Optimizing Alpha, we aim to take the stress away from prepping your taxes. That way you know that they’re done the right way, the first time.
