A record number of workers voluntarily left their jobs in 2021 in what’s now termed the Great Resignation. However, this trend has been going on for years and is continuing in 2025. Why are so many people leaving their jobs?
One of the main reasons is that technological advances have opened up opportunities for workers. It’s now easier than ever to work remotely and to use your skills as a freelancer or independent contractor. This article will provide a quick review of the differences between these 1099 vs W-2 workers, focusing especially on their tax obligations and those of their employers.
Summary of Differences Between 1099 vs W-2 Workers
| 1099 Workers | W-2 Employees | |
| Tools and equipment (means of production) | Own their means of production | Use the means provided by their employers |
| Working hours and schedules | Set their own hours | Set by their employers |
| Pay | Receive 100% of the contracted | Receive their pay minus the income, Social Security, and Medicare taxes withheld by their employers |
| Pay schedules | Paid irregularly, based on work milestones or fully completed tasks | Paid regularly, ex. every two weeks |
| Benefits | Group health plans and retirement savings plans may be provided | Paid vacation, retirement savings, health insurance, etc., are commonly provided by the employer |
| Perks | Not typically provided for contractors | May be provided or reimbursed by the employer (ex., childcare, transportation allowances, etc.) |
What is a 1099 Worker?
In simple terms, 1099 workers are people whom companies can hire to work for them who are not considered employees. Instead, these people are usually independent contractors or freelancers (these terms mean the same thing under US tax law). They’re generally hired on a piecework or contract basis to perform non-durable.
In other words, they generally provide one-off services rather than working long-term. Examples include a building contractor hired to construct a house by the homeowner or a freelance illustrator hired to illustrate a children’s book by a publisher.
It’s very important to correctly classify workers as contractors and not employees for financial and benefits reasons. Employers are required to withhold tax payments from their employees but not from 1099 workers. These contractors instead receive their fully contracted payment amounts and then pay their own taxes out of these totals.
Employers who hire contractors must report payments to them with the Internal Revenue Service (IRS) Form 1099-NEC, Nonemployee Compensation. This is why contractors are often called 1099 workers.
Contractor Classification
The IRS is very strict about the classification of independent contractors as misclassifying employees as contractors can deprive them of certain rights and benefits. The assessment of whether or not a worker is a contractor depends on the amount of independence and control they have over their own work.
The following conditions are considered in these assessments:
- Control: Does the employer closely control the worker? If the worker sets their own hours and methods of producing work and only follows a schedule for delivering work, they may be a 1099 contractor.
- Finances: If the worker owns their own tools and equipment for producing work, is not paid on a regular schedule, and cannot claim expenses, they may be a contractor.
- Relationship: Does the employer provide benefits like vacations and retirement savings? Is the work ongoing? Does the work provided represent a core aspect of the employer’s business? Does the worker work for a single employer or have the ability to work for multiple employers at the same time or in succession? If the answer is no to all of these questions, the worker is likely to be an independent contractor.
What is a W-2 Employee?
In contrast with a 1099 contractor, a W-2 employee is someone who works regularly for an employer. Employers can dictate the hours they work, choose where they work (on-site, remotely, or a combination), and tell them which tasks to perform in what order. Employers are also responsible for giving their employees the tools, equipment, and other means they require to perform their duties. This can also include access to data and software tools.
Employers must pay their employees on a regular schedule (biweekly, weekly, monthly, etc.) and may also provide them with benefits such as paid time off (PTO), health insurance, or retirement savings. The employer must also withhold income, Social Security, and Medicare taxes from their employees’ paychecks and remit these amounts to the relevant authorities.
At the end of each year, the employer must provide a W-2 tax form to each employee whom they paid at least $600 and from whose paychecks they withheld taxes. Form W-2, also known as a Wage and Tax Statement, gives a summary of the earnings the employee was paid and the taxes withheld from their paychecks for the year. This is why employees are often referred to as W-2 employees. This form must be filled out by the employer and delivered to each employee no later than January 31st after the year they worked.
Taxes for 1099 Contractors
In general, contractors are responsible for taking care of their tax obligations on their own. Their various employers over the year must each provide them with a Form 1099 to report on how much they were paid.
This form has four copies, and the employer provides all of them:
- For the state tax authority – Copy 1
- For filing with the recipient’s state tax return – Copy 2
- For the IRS – Copy A
- For the recipient’s records– Copy B
The 1099-NEC form provides the following information:
- The payer’s name, address, and tax identification number (TIN)
- The recipient’s name, address, and TIN
- The total compensation paid to the recipient
- Any state or federal taxes withheld (normally zero)
Contractors use the information on all of their 1099 forms for each quarter when they file their state and federal tax returns. They typically don’t need to file these forms with their federal returns. They’re responsible for filing their own income tax returns and paying the taxes they owe as determined by the IRS on April 15, June 15, September 15, and January 15. They do this using Form 1040-ES, Estimated Tax for Individuals.
Contractors are also responsible for paying their own Social Security and Medicare taxes through a combined tax called the Self-employment tax. This tax is applied at 15.3% which is the same as combined employee and employer contributions, but contractors pay the whole thing themselves. They’re not responsible for FUTA (Federal Unemployment Tax Act) contributions as contractors can’t make unemployment claims.
Taxes for W-2 Employees
Taxes work very differently for W-2 employees. Their employers are responsible for tracking their earnings and withholding payroll taxes for them. New employees fill out W-4, Employee’s Withholding Certificate, when they’re onboarded or when they need to make changes to their withholding status.
With this form, they state their salaries, other income, and dependents to determine their income tax rate for the year. The employer then calculates their salary for each pay period and withholds this percentage of their pay to remit to the IRS and state or even local tax authorities.
Their employers must also withhold their Social Security and Medicare taxes. Employers also pay matching contributions for Social Security and Medicare so the employer and employee each pay 6.2% and 1.45% respectively.
In addition, employers need to pay FUTA contributions of 6% on each employee’s first $7,000 in wages. Some states like Alaska, New Jersey, and Pennsylvania also collect state unemployment insurance contributions from employees.
All of this information is included on the W-2 that the employer needs to provide at the end of each year of work. Employers need to prepare six copies of the W-2 and distribute them by January 31 at the latest.
These copies go:
- to the state, city, or local tax department – Copy 1
- to the employee to be filed with their state, city, or local income tax return – Copy 2
- to the Social Security Administration – Copy A
- to the employee to be filed with their federal tax return – Copy B
- to the employee for their personal records – Copy C
- to the employer’s records – Copy D
Employee Misclassification Penalties
What happens if an employer doesn’t correctly classify a worker as an employee but instead misclassifies them as an independent contractor? Normally, employees are entitled to greater benefits and protections than contractors.
For example, they can only be made to work regular hours (typically 40/week) and overtime, which, according to the Fair Labor Standards Act (FLSA), must be paid at the rate of at least 1.5 times their normal wages.
Employers who misclassify workers as 1099 contractors when they should be treated as W-2 employees can be liable for penalties, including:
- 1.5% of the worker’s wages for failing to withhold federal income tax
- As much as 40% of Social Security and Medicare taxes are owed for failing to withhold them
- All of the unpaid Social Security and Medicare taxes for that worker
- At least $60 for not filing the worker’s W-2 form
1099 vs W2 Summary
The bottom line is that W-2 employees are permanent workers who the employer needs to take care of and withhold taxes for. On the other hand, 1099 workers are independent contractors who have to take on the responsibility of handling their own taxes. If employers misclassify employees as contractors, they can face strict penalties at the state and federal levels.
