1099 vs W2 vs W9: Key Differences
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Summary:
W2 employees are protected by labor laws and workers’ compensation insurance. They can have their taxes withheld by employers and obtain employee benefits. 1099 and W9 workers are independent contractors and lack these protections and benefits.
If you are getting a job offer, tax forms are going to be a major part of your onboarding. What many employees don’t realize is that the forms you fill out can tell you volumes about your role in the company. Before you sign your tax forms, check to see the type of form you have.
As noted in a companion article, you will fill out either a W4 or a W9. A W9 indicates you are an independent contractor who will receive a 1099 at the end of the year. A W4 indicates you are an employee and will receive a W2 at year’s end.
As you can see, the different tax forms have different legal rights and implications associated with them. The implications of a W9 and 1099 are very different from those of a W4 and W2. It’s important to realize what this means for you as a worker.
Before you agree to a form of employment, you should realize that each type comes with its own perks and pitfalls. Here’s what you need to know about the differences between W2 and 1099 workers.
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W2 vs 1099 workers: what are the differences?
With both W2 and 1099 status, you’re being paid by a company to perform work. However, the big difference is your employment status. W2 workers are actually fully hired by the company. 1099 workers are contract workers.
More clearly, W2 recipients are payroll employees while 1099 users are independent contractors. In terms of perks and pitfalls, this distinctions has massive implications.
| W2 | 1099 | |
|---|---|---|
| Hire status | Employee | Contract worker |
| Workers’ comp protection? | Yes | Probably not |
| Tax withheld by the employer | Yes | No |
| Employer controls hours | Yes | No |
| Layoff protections, unemployment | Yes | No |
| Employer controls location, uniform | Yes | No |
| Employee benefits | Yes | Probably not |
What is a W-9 form?
As a 1099 worker, you’ll deal with two forms. The W-9 form is the one you, as an independent contractor, will have to hand in to your employer or client. When the year ends, the employer sends out a 1099 tax form with all your earnings for the year.
Is W-9 the same thing as 1099?
For most purposes, saying you get a W-9 is the same as saying you’re a 1099 worker. But W-9 and 1099 are definitely not the same thing. They are two different forms. You’re going to be filling out the W-9 on an annual basis. Your employer will be handing you the 1099 forms at year’s end.
W2 vs. W9 vs. 1099
We should probably go through the basics of what to expect with each of these forms. Let’s do that now.
An employer issues W2s to employees
You fill out Form W-4 when you start a job, then each year if your tax situation changes. Based on this form, your employer determines how much to withhold from your paycheck. When the tax year ends, your employer will issue a W2 summarizing your earnings and withholdings for the year.
W9 and 1099 forms are exclusively for freelancers
If you are a freelancer (independent contractor) instead of an employee, you will fill out a W9 instead of a W4. The W9 will provide your taxpayer identification number and confirm your contractor status, but your client won’t withhold any taxes from your payments based on it. When the tax year ends, your employer-client will issue a 1099 showing how much you earned.
What if I don’t complete a W9 or get a 1099?
Federal tax laws only mandate W9s and 1099s for certain client-contractor arrangements. This mostly depends on how much work you do for a client. If you only do small, occasional jobs for an employer, you may never be asked to complete a W9 and may never receive a 1099. You still have to pay your taxes on all your freelancer income, though. Sorry.
As well, online freelancing sites and payroll services may handle some form preparation behind the scenes in a way you might fail to notice until you get your 1099 at year’s end. You should peruse the FAQs and help pages of any sites and services you use to see if, say, information you provided when you signed up is already being used to generate tax forms. You’d need to have checked a box consenting to this at some point, but how often do you actually read the entirety of those online forms you’re asked to check acceptance boxes for?
Can you be both a W2 and 1099 worker for the same company?
Normally, your relationship with an employer will be either that of an employee, in which case you’ll deal with W4 and W2 forms, or of a contractor, in which case you’ll deal with W9 and 1099 forms.
It is possible, however, to do freelance work after your W2 work for the same employer. For instance, you might leave a full-time job in the office then, a few weeks later, agree to keep doing freelance work for your old employer on a part-time basis from home. In that case, you would end up filling out both Form W-4 and Form W-9 and receiving both W-2 and 1099 forms after the tax year concluded.
In sequence, yes. At the same time, no.
Lest any employers get ideas, you cannot switch someone to contractor status during off hours to avoid having to pay overtime. Labor law is strict about your having to pay an overtime rate to hourly workers who put in extra time. Your W2 employees will be W2 employees for all the work they do for you. If you prefer to use them as contractors, you’ll need to let them go as employees then hire them back on to do freelance work.
But labor law is a complex matter
Since this is a matter of law, there may be untold complexities that this broad overview fails to capture. For instance, what about salaried workers who are not hourly? These guidelines try to suggest a safe and prudent course that covers most cases. If you prefer to do something complicated to exploit what you perceive as loopholes in labor law, consult an attorney.
A W2 form means that your employer will handle your payroll taxes
Put simply, payroll taxes are taxes paid on the wages and salaries of employees. These taxes are used to finance social insurance programs, such as Social Security and Medicare….The largest of these social insurance taxes are the two federal payroll taxes, which show up as FICA and MEDFICA on your pay stub. ” — Tax Foundation
Both employers and employees contribute to the total amount paid in payroll taxes for each worker. So, a portion of the payroll taxes paid for you will appear as withholdings from your paycheck. Social Security (FICA) is an example, as are unemployment taxes. Both federal and state “social insurance” programs get funded through payroll taxes, so your pay stub may look different depending on where in the U.S. you’re employed.
As a W2 employee, you will also receive various benefits from your employer not normally offered to contractors. In some cases, these will be legally required. In others, they will be offered as incentives to bring you on board, possibly with a lower base salary than you’d get without the benefits.
Should you curb your enthusiasm about employer-paid payroll taxes?
Since employers take payroll taxes into account when negotiating salary with employees, you shouldn’t think your employee status is getting you some free charity courtesy your employer. As the Tax Foundation observes, “Perhaps one of the best-kept secrets of payroll taxes is that employees effectively pay almost the entire payroll tax, instead of splitting the burden with their employers.”
Getting a 1099 form means you have independent contractor status and that you earned money
This means you’re going to have to handle all the federal employment taxes on your own. You also may have to deal with state income taxes. You do not get employee benefits, but you can write off business expenses.
Why is W2 employment so popular?
W2 employment means that you get a lot of protections that have been written into law by the U.S. government. Reasons that employees may value these protections include:
- Unemployment insurance. In all states, people who are laid off get to apply for federal unemployment. This can act as a fiscal buffer for people.
The Federal Unemployment Tax Act (FUTA), with state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs. Most employers pay both a Federal and a state unemployment tax.” — IRS
- Your taxes are going to be prepaid, at least to a point. W2 employees pay their taxes through their employer. In the case of payroll taxes like Social Security, the amount paid by employees through withholding is only half, the other half being charged to the employer. In the case of income taxes, employers ensure that taxes withheld from your paycheck get to the IRS. This means you’ll owe less come April 15th.
- Workers’ compensation will ensure you get paid if you get injured on the job. This is vital if your job requires heavy lifting.
- It also can come with employee benefits like health insurance, commuter discounts, and disability insurance. Employee benefits are only available to those who are actually employed. Federal and state laws offer certain advantages, most often tax advantages, to employers who offer certain benefits to employees rather than just higher salaries. In many cases, laws will mandate certain benefits for employees, meaning these benefits cannot be negotiated away or traded for other perks or additional salary.
- You are more likely to be a part of a union. While self-employed people can be unionized, most people who are in a union are going to be W2 employees. Many employees continue to support unions and believe unions are worth the cost of membership.
- When you retire, you may get more Medicare benefits and Social Security perks. Though self-employed people are required to pay into Social Security and Medicare, their earnings may lack the consistency of W2 employees’. Only retirees who’ve paid into Medicare and Social Security for a minimum of 30 years qualify for certain perks.
Why is W2 employment losing popularity?
This is a complex issue beyond the scope of this article. The changing landscape of modern employment is a matter of scholarly investigation and debate from Harvard and Princeton to the Wharton School of the University of Pennsylvania. However, here are some possible contributors to the change.
From employees’ perspective
W2 employment is not as steady as it once was. And, truth be told, having your income tax withheld from your paycheck isn’t always that big a perk — especially when you’re having a hard time making ends meet. It can make it hard to save money. And, at times, you may pay taxes that are higher than what an independent contractor would.
The bigger issue is the amount of control a company has over its employees. Everything from forcing you to work specific hours to making you wear something hokey can make you feel more like a wage slave than a valued member of a team.
From employers’ perspective
On a similar note, companies have to make a huge investment every time they decide to hire someone as a W2 worker. With a big investment comes bigger risk.
1099 workers pose less risk. They do not always get their contracts renewed. In some cases, unsatisfactory 1099 contractors may be easier to get rid of than unsatisfactory W2 employees. 1099 workers lack some of the legal protections that W2 workers have and are not subject to minimum wage laws. (The latter means that 1099 workers could agree to take less if they had some reason to do so, not that employers can pay them any less than agreed. Contracts with 1099 workers are just as legally binding as contracts with W2 workers.)
The 1099 advantage may only be temporary
For the time being, hiring independent contractors may provide flexibility that hiring full employees does not. Regulators invariable lag behind new developments, but they never remain idle. While full employees were regulators’ primary focus in the past, that may change as independent contracting grows in prevalence. Insofar as government action has given independent contracting a competitive edge over full employment, that edge may only be temporary.
Why is 1099 employment so popular?
With 1099 contracts, you will have to pay Social Security taxes and, if you earn enough, estimate and pay your own income taxes every quarter. This puts a huge onus on your work and basically funnels you into the role of a small business owner.
While W2 employment has its perks, the truth is that 1099 work is starting to gain popularity too. Here’s why:
Key reasons 1099 employment is becoming more popular
- Employers cannot legally control what you wear or force you to abide by company policies. In other words, a 9-to-5 job is not legally enforceable with a 1099.
- You get to negotiate your own wages. Typically, self-employed individuals will bring home more money each week — even when tax obligations are factored in. People in management may also be less guilt-trippy when dealing with you, since you are an independent businessperson providing a service, not part of your client’s company.
- You can also DIY your own employee benefits. Depending on how much you work, you can buy your own health insurance, create your own HSA (health savings account), and look into other small-business perks. If you embrace an alternative or holistic approach to health and wellness, your independent status may let you tailor your benefits in a nontraditional way few employer benefits packages will permit.
- It allows you to access the main perk of gig workers: multiple clients. With W2 employment, your entire income comes from a single relationship to an employer in most cases. Losing your only job means devastation. Self-employed workers can have multiple clients. So, if one relationship dissolves, you still can serve multiple clients and recoup that loss through other streams. (Of course, you can have a W2 job and do 1099 work with multiple clients as a side hustle — if you have that kind of energy.)
What are the drawbacks of 1099 work?
The drawbacks mostly come when tax season arrives. Your tax payments, when compared to those of W2 employees, may seem sky high. You have to pay the entirety of your Social Security and Medicare taxes, which means you will have to set aside money from your paychecks to cover taxes. If you’ve gotten used to having most of your taxes taken care of by someone else during the year, handling it yourself for the first time can be brutal.
Tip: Savvy independent contractors get software to help
Accounting and tax-preparation software can make doing your taxes as a small business owner much less aggravating. Acquiring the right software, and learning how to use it, can stave off countless headaches when you do your taxes.
What’s employee misclassification?
Employee misclassification is the act of an employer classifying an employee as an independent contractor, whether knowingly or by mistake. This is illegal and goes against labor laws, not to mention tax laws.
If your employer does this, you can usually tell the IRS or sue them because they denied you the workers’ compensation and unemployment insurance you were entitled to. If you only discover the misclassification when you try to make a claim for workers’ comp or unemployment, you could find yourself paying some pretty big expenses on your own. Before emptying your savings, raiding your retirement, or filing for bankruptcy, you might want to talk to a lawyer.
How can you tell if you have been misclassified?
The truth is that there is no cut-and-dried answer to this. In many cases, you may need to see a written contract to get a better idea of what your role is. However, there are some clues that you may have been misclassified:
Suspect you’ve been misclassified when…
- You are being told that you have to pay your own Social Security and Medicare taxes, but you do the same thing as a typical employee in the office. A W2 employee has many more protections and entitlements than independent contractors do. If you’re both doing the same work, you deserve the same benefits, and lawmakers have made this mandatory. Employers and employees cannot legally make arrangements that violate labor laws.
- The employer expects you to make significant investment in your job role. Does your employer demand that you buy your own toolkits? You’re not allowed to require your W2 employees to cover major expenses or ask them to pay money to work for you. If you have to buy your own tools and equipment, you’re being treated as a contractor.
- Your written contracts mention that you have to wear a company uniform and show up 40 hours per week. If you are working a full-time job controlled by a manager, you’re not an independent contractor. Independent contractors must remain free to acquire other clients. Again, this is a matter of labor law. Even if you wanted to remain an independent contractor while working like an employee, your employer could not legally allow you to do so.
- Your paychecks are being docked for retirement contributions, but you’re being told you’re an independent contractor. As noted by the U.S. Chamber of Commerce, an employer can offer certain retirement benefits, including with employer matching, to 1099 workers. You and your employer will need to have agreed to this explicitly, however. Otherwise, you could be dealing with theft and a breach of contract, in which case you should report the violation and, possibly, contact law enforcement.
FAQ
What are the disadvantages of being a 1099 employee?
The biggest difference is that you will not have any income taxes withheld from your paycheck every period. All payroll taxes, including Social Security and Medicare taxes, are going to be your burden. You also won’t have coverage from workers’ compensation insurance.
What is the pay difference between W2 and 1099?
In theory, 1099 workers can demand higher pay because hiring them involves less overhead. Employers don’t have to pay them all the benefits they pay W2 workers, for instance.
In reality, this mostly depends on your contract and tax situation. The big guaranteed difference is tax withholdings. 1099 workers fall into the same tax brackets as W2 employees, so equivalent incomes will mean equivalent income taxes.
1099 workers do officially have to cover both the employee and employer contributions to Social Security and Medicare. However, as an independent contractor, you are, per the IRS, allowed to “deduct the employer-equivalent portion of your self-employment tax in figuring your adjusted gross income,” so you don’t really have to cover both contributions. Deductions for business expenses may further compensate the freelancer.
Depending on how accurately they estimate their taxes for quarterly estimated income tax payments, 1099 contractors may end up owing more at tax time than W2 employees. Of course, they may also get to hold onto, and put to good use, more of their own money during the year than W2 employees do. Which sound better to you? It’s very much a matter of preference.
It’s also a matter of preference whether you think employee benefits are more or less valuable than the freedom and flexibility of being self-employed.
How much tax do you pay on 1099 income?
1099 workers have to pay the self-employment tax, which is a tax on top of the typical income tax that most employed workers already pay. This tax is an additional 15.3%. 12.4% goes to Social Security, and an additional 2.9% goes to Medicare.
This isn’t as bad as it sounds, though. W2 workers also have to pay Social Security and Medicare. They just don’t have to pay them all at once at tax time. These charges are, instead, deducted from their paychecks. W2 workers also, officially, pay lower percentages, since their employers must contribute half. The current rates for employees are 6.2% for Social Security and 1.45% for Medicare.
Key takeaways
- A W9 is for independent contractors to hand to their employer, and a 1099 is what they get when they complete their work for the year.
- W2 employment is a typical 9-to-5 job, and their employers withhold income taxes from their paychecks.
- Independent contractors use 1099 and W9 forms for their labor.
- If you are a 1099 worker, then you have to take care of your own taxes, but you can deduct business expenditures.
Two possible problems, two resources to help
If you are trying to file your taxes but have not gotten W2s from all your employers, read How to Get Your W-2 from a Previous Employer. This article tells you what you need to know to ensure you get the W2 you need from employers you stopped working for during the tax year.
Did you recently get offered a position as a 1099 employee? If so, you need to learn what to expect. You can do that by reading What is a 1099 Employee? The Definitive Guide to 1099 Status. Like the title says, this is a definitive guide. If you need to know something about being a 1099 employee, this article’s got you covered.
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