Whether you’re searching for a new job or a side hustle, it’s a good idea to know the difference between being a 1099 or W2 worker. The two vary in terms of independence and also make a big difference at tax time.
What is a 1099 worker?
Self-employed and contract workers receive 1099NEC tax forms to report non-employment income for taxes. Some common examples of 1099 workers are freelancers working on an assignment or project basis, consultants working with a clear start and end date, or gig workers (think Lyft or Shipt). 1099 employees are typically more task-oriented. These workers may be paid hourly or set a fee for each completed project.
What is a W2 employee?
W2 employees are your typical salaried workers with scheduled hours. These positions are focused on fulfilling a role, rather than completing specific tasks or projects. They are formally employed by a company and receive a W2 tax form from their employer to report their income and taxes.
When W2 employees are paid, generally income tax is already withheld. Employees will also receive benefits such as 401(k) matching and health insurance.
Understanding the differences
According to the IRS, the degree of control and independence should be considered to determine whether a worker is an employee or an independent contractor.
Facts that provide evidence of the degree of control and independence fall into three categories:
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
So which is better? 1099 vs W2
This can be a tough choice! There are pros and cons to both types of roles, ultimately it will come down to your preferences and financial situation.
Pros of 1099
Flexibility. Most likely, you’ll be able to choose when you work and what projects you take on. As an independent contractor, there’s a lot more flexibility as long as you hold up your side of the contract. You also will most likely be remote the majority of the time.
Tax deductions. As a 1099 employee, you are considered self-employed and can write off business expenses such as mileage, meals, and home office expenses.
Multiple clients. Most 1099 workers choose to work for multiple clients allowing you to build out a more diverse portfolio and skillset and have more variety in your work.
Set your own prices. You can choose your own rates and likely make more than in a salaried role. Keep in mind that the extra income will have to go toward taxes, health insurance, retirement savings, etc. since you will have to cover all of this yourself.
Pros of W2
More consistency. W2 roles are more structured and tend to be more long-term positions. Plus, your monthly income will stay consistent.
Room for growth. These positions have more opportunities for advancement including annual raises and promotions.
Paid time off and benefits. While part-time employees might miss out on some of these, annual leave and sick time can provide some extra financial stability when you want to take some time off. Insurance through and employer can be much cheaper.
Set hours. This isn’t a guarantee, but some workers may find it easier to stick to only working during the typical 9-5 and not bring their work home.
Cons of 1099
Estimated taxes. You’ll have to calculate and pay taxes every quarter
Accountability. You will need to hold yourself accountable
Health insurance & Retirement savings. You will need to cover your own health insurance and retirement saving. This will likely cost you more as you won’t have any company matching.
It can be overwhelming. Working for multiple clients means balancing more tasks and communicating with more people.
Vacation and sick time. Since you aren’t a salaried employee, you won’t get vacation or sick time. Luckily, the flexibility of these positions can allow you to adjust as needed, but you’ll need to account for this time off financially.
Cons of W2
Less flexibility. Not only will your hours likely be more structured, but you’ll have to request time off and be less able to adjust your schedule as needed.
Undesirable projects. As an official employee, you’ll probably have to take on some tasks you would rather not.
Toxic work environment & bad work relationships. Ever had interpersonal troubles with a coworker? As a W2 employee, you will most likely have to work more closely with them than as a contractor. The same is true for toxic work environments since you will be working more closely with the team.