1099 vs. W-2 Employees: Which Is Best for Your Business?
If your small business is ready to hire extra help, you have two options to consider: 1099 workers or W-2 employees. These two classifications refer to the respective IRS forms employers are required to send when tax season rolls around.
While both 1099 and W-2 workers could benefit your business in different ways, there are government rules and regulations regarding how to classify each. Here’s what you need to know about 1099 versus W-2 and how to pick which type (or a combination of both) works best for your business.
What’s the difference between 1099 and W-2?
Before hiring employees for your business, it’s important to understand the difference between 1099 workers and W-2 employees — and how each could help your business. Keep in mind that whatever you decide doesn’t have to be set in stone. You can change methods or use a combination of both as your business needs change.
What is a 1099 worker?
A 1099 worker is a self-employed individual or independent contractor who’s paid per project or task as opposed to receiving a regular salary. You can hire a 1099 worker on an as-needed basis or for ongoing work. You will need to file a 1099-NEC form if any non-employee workers were paid $600 or more in a tax year.
Businesses can usually save on certain expenses by hiring freelancers. For example, you don’t need to withhold payroll taxes or provide benefits like health insurance, paid time off and retirement savings. That said, contractors often charge higher hourly or project rates than salaried employees in order to cover their tax expenses and lack of predictability with their income. In addition, you might have a higher turnover rate with independent contractors, which could end up costing your company more in the long run.
What is a W-2 employee?
A W-2 employee is a part- or full-time employee on your company’s payroll who earns either an annual salary or an hourly wage. If your company withholds income, Social Security or Medicare taxes, you will use a W-2 form for any employees who earned $600 or more for the year.
In general, you will have more overhead when hiring W-2 employees versus 1099 workers, such as:
- Managing employee tax withholdings
- Paying state-mandated insurances like workers’ compensation and unemployment insurance
- Offering health insurance and retirement plans
- Providing relevant job training
Some companies also offer benefits like paid time off and childcare subsidies to attract and retain top-level talent.
In exchange for these extra expenses, companies have more control regarding when their employees work, how they work and the tasks they complete. Businesses usually want W-2 employees who perform well to remain with them for as long as possible.
| 1099 employee | W-2 employee | |
| Best for | Specialized tasks | Committed help |
| Tax withholdings | The worker is in charge of their own tax withholdings | The business is obligated to manage tax withholdings, including Social Security and Medicare |
| Tax forms | They fill out a W-9 form before they start working for you | They fill out a W-4 form before they start working for you |
| Payroll | Pay is typically based on each task accomplished or invoices billed for hourly work, using payment methods like check, PayPal, Venmo, Zelle or others | Pay is typically hourly or salary, using a payroll service to issue regular paychecks |
| Insurance | The employee is in charge of sourcing all of their own insurances | You provide workers’ compensation insurance and unemployment insurance, plus health insurance if you have more than 50 employees |
| Benefits | The employer isn’t expected to offer any benefits beyond pay | The employer may be expected to offer vacation and sick days, a pension, 401(k) matching, health insurance, and more |
Examples of 1099 and W-2 roles
While some roles could fall into both the 1099 and W-2 categories, here are some job examples that typically require one categorization over the other.
1099 contractor roles
Freelancers and independent contractors usually have a specialized skill set with flexible schedules, allowing you to utilize them for short- or long-term projects. Here are examples of workers who might receive a 1099:
- Freelancers: If you need help with a specific project, such as editing blog posts, redesigning your company’s website or taking professional headshots for your team, you can hire an expert freelancer on a project-by-project basis. You can often find freelancers on local job sites, LinkedIn, UpWork, Fiverr and more.
- Consultants: These are experts who are able to give advice on a contractual basis, such as helping with your management, IT or marketing strategies.
- Real estate agents: Licensed real estate agents are typically considered nonemployees since they make commissions based on real estate sales instead of a steady salary. That said, if a real estate agent is paid for other duties outside of selling houses, such as office or clerical tasks, they would need to go on payroll and receive a W-2 statement for those earnings.
W-2 employee roles
A W-2 employee can work part-time or full-time. These jobs typically have set hours and well-defined tasks. Here are some examples:
- Restaurant employees: Chefs, servers and other staff in the restaurant industry typically work set hours on a regular basis.
- Health care workers: Nurses, doctors, dentists and other health care workers are generally hired as W-2 employees.
- Educational providers: Teachers and teachers’ assistants need to stick to a regular schedule so typically fall into the W-2 category.
- Retail workers: While hours can vary for retail workers, you generally are a W-2 employee since you agree to working a set amount of hours per week or month.
IRS test to determine 1099 vs. W-2 employee status
If you’re unsure what type of worker you need for a specific role, you can refer to the IRS independent contractor or employee guidelines or file IRS form SS-8 to determine worker status. Note that the IRS may take up to six months to answer.
In the meantime, you can ask yourself the following questions to help classify workers appropriately:
1. Behavioral
How much control does the company have over what the worker does and how they do it? Does the worker need to work specific hours?
If you expect a worker to put in 30 hours a week and complete a set number of tasks while being available from 9-to-5, they are likely an employee and not a freelancer.
2. Financial
Who provides the resources for the worker, such as tools and supplies? Does the employer determine how the worker is paid? Does the employer determine reimbursements?
If the worker completes and delivers the agreed-upon project(s) independently with their own equipment, without any additional support needed from your end, they are likely an independent contractor.
3. Type of relationship
What does the employment contract look like? How long will the relationship last? How essential are the workers’ tasks? Does the employer offer benefits?
If you provide paid vacation days, sick leave and health insurance, your workers will need to go on payroll and be treated as W-2 employees.
Remember, one key difference between a 1099 worker and a W-2 employee is the level of freedom and flexibility. Just as the names “freelancer” and “independent contractor” imply, nonemployees typically have complete control over their schedules and workload. Meanwhile, employees are generally expected to work during standard hours while fulfilling a regular list of tasks.
What is the tax rate for 1099 vs. W-2?
Independent contractors and freelancers who receive 1099s are responsible for paying the full 15.3% self-employment tax as quarterly payments to the IRS. They make these payments from their own earnings, with no help from the companies that hire them. However, a freelancer’s final 1099 tax bill will be based on their net income after deducting qualified business expenses, such as mileage, home office, supplies and more.
In contrast, the employer is required to pay half of their W-2 employees’ Social Security and Medicare (FICA) taxes, which equals 7.65%. The other half is withheld from employee paychecks. W-2 employees can’t deduct general expenses for work, such as travel, a co-working space, supplies or meals — although some employers may reimburse them for some of these expenses.
Penalties for miscategorizing employees
Several government entities, such as the IRS, the Department of Labor and state agencies, can issue heavy penalties for misclassification. These rules are in place to help protect workers from employers taking advantage of the lower cost of a 1099 employee while demanding the same control they’d have with a W-2 employee.
Claims can go back as far as three years and are more severe when it’s proven that the business intentionally or fraudulently misclassified workers.
Possible penalties include:
- $50 fine for each W-2 you didn’t file for misclassified employees
- Up to 3% penalty on all misclassified employees’ wages
- Up to 40% of the FICA taxes you failed to withhold (also called back taxes)
- 100% of the FICA taxes you didn’t pay for each misclassified employee
In addition, your business could face any of the following criminal charges:
- Up to $1,000 in penalties per each misclassified employee
- Up to one year of jail time
- Class-action lawsuits, plus associated attorney fees
- Payments for missed employee benefits, such as health coverage, paid leave, retirement matching plans, workers’ compensation, severance pay, unemployment insurance and more
How to decide what’s best for your business
Deciding between 1099 versus W-2 employees depends on your current and future business needs. Here are some aspects to consider as a business owner when thinking about your hiring needs:
- Amount of work: How much work do you need done? Do you need someone to complete a few hours of work a week for the next three months? Or do you need someone to take on at least 20 hours a week for the foreseeable future?
- Talent availability and type of work: Do you need someone with specialized, hard-to-find knowledge right now? Do you have a longer time frame that will allow you to train someone?
- Turnover impact: How much will it affect your business if the person in this role changed frequently? Will the person be key to the company’s mission?
- Compensation abilities: Is your business able to sustainably support W-2 workers? Can it offer a large enough compensation package — either a healthy per-task rate or a salary, benefits and bonuses — to attract good talent?
A 1099 employee is typically less expensive than a W-2 employee and ready to immediately accomplish a task without any extra training. However, they can usually pick and choose what work they accept — as such, they may not always be available to take on the work you need done.
While W-2 employees are more expensive and typically expect additional benefits, they also provide consistent benefits for the employer. They are obligated to take on tasks that fit their job description within their normal work hours.
A 1099 worker could be a good fit if your business:
- Needs extra help on an occasional or sporadic basis
- Doesn’t consistently have enough work or the budget to hire another regular employee
- Wants to avoid the hassle of managing payroll taxes or offering additional benefits
- Prefers to bring on a specialized expert to help with focused projects and tasks
- Likes the idea of being able to terminate a work-relationship easily after the project is completed
A W-2 employee could be a good fit if your business:
- Wants committed workers you can rely for consistent work over the long term
- Prefers to train employees to streamline in-house methods and systems
- Can sustainably support another person’s compensation package
- Prioritizes having a positive work culture where the team can connect and grow together over the years
Important deadlines for filing 1099s and W-2s
The deadline to file forms W-2 and 1099-NEC (nonemployee compensation) to your workers and employees is January 31 of the year following the payment year. For example, you will need to deliver these forms by January 31, 2025, for any wages or compensation paid in 2024.
The same deadline applies to providing these forms to the government, regardless if you submit electronic or paper documents. Some accounting software can help file electronic 1099 and W-2 forms for you.
If your business is unable to meet this deadline, you can request a 30-day extension with Form 8809. However, you must meet one of the IRS’s eligible reasons before being granted a filing extension. After this, you can’t apply for an additional extension.
Note that if you fail to issue the required 1099 forms by the deadline, penalties between $60 to $310 may apply per form, depending on how long it takes you to submit the forms. And if your business never submits the required paperwork, you could face a minimum penalty of $630 per form or 10% of the reported income, with no maximum fine.
Classifying interns
There is a third type of worker classification available to businesses: interns and students. The Fair Labor Standards Act does not require that interns or students be compensated for their work. You can read more about unpaid interns from the Department of Labor page.
If your business can provide educational training, including hands-on and clinical work, an intern or student may be an option outside of the normal 1099 contractor and W-2 employee.
Frequently asked questions
There are situations where the same person could receive both a W-2 and 1099 from a business. For instance, if a salaried employee also serves on the board of directors, they would receive a W-2 for their regular job, plus a 1099-NEC for their director role.
Another example is if someone quits their salaried job in the middle of the year, but continues on with the company as consultant or freelancer for the remainder of the year. In this case, they would receive a W-2 for the wages they earned for the first half of the year, and a 1099 for the remainder of their earnings.
Note that filing both a W-2 and a 1099 for the same worker in the same tax year could raise a red flag for the IRS. Because of this, make sure to follow all the rules on employee classification and keep adequate records of why you needed to submit both forms.
There are many benefits to being a 1099 worker, such as having more control over your workload and schedule, plus the ability to start multiple side hustles to boost your income. In addition, freelancers can claim qualified business expenses to help reduce their taxable income. However, freelancing comes with a certain level of uncertainty and unpredictability, especially if you lose an anchor client.
For those who crave more stability and want to grow with a team, having a W-2 position might be a better fit. Being a regular employee also comes with a range of perks, such as paid time off, sick leave, health insurance and retirement matching plans. However, there’s no guarantee a W-2 job will last forever — you could end up being cut away during a round of unexpected layoffs.
In the end, you have to decide what works best for you: Being completely in charge of your schedule or building a strong relationship with the same company over years to come.
There’s no limit to how many hours a 1099 employee can work. Freelancers and independent contractors aren’t subject to overtime rules, workers’ compensation or other government regulations and guidelines.
That said, if you require a 1099 employee to work 40 hours a week with availability from 9-to-5, you might want to classify them as a W-2 employee instead. Disguising a full-time job as a freelance position could result in misclassification fees and penalties from the U.S. Department of Labor.