1099 vs. W-2 Employees: What's the Difference?

Many businesses employ both full-time staffers and contractors, and it can be tricky to differentiate between the two—particularly when they have similar roles and responsibilities.

But there are significant differences, both in terms of workers’ personal bottom lines and in the eyes of the IRS.

To better understand the nuances between the two designations, the first place to start is with the tax forms each group uses. Simply put, 1099s and W-2s are two separate tax forms for two different types of workers.

What is a 1099?

A 1099 is the tax form a company issues to an independent contractor and shows how much you were paid for the year. If you’re a contractor, you are responsible for calculating your payroll taxes and submitting that amount to the government quarterly. In 2023, the self-employment tax rate is 15.3 percent, which covers Social Security (12.4 percent) and Medicare (2.9 percent). (If you’re a W-2 employee, your employer covers half of these taxes.)

1099’s are also used to report other types of income—like unemployment compensation, distributions from retirement plans or dividends. As a freelance worker or business owner, however, you’ll likely receive one of these two forms:

• 1099-MISC: Any business that paid you more than $600 for services within a year should issue you a 1099-MISC. You may also receive a 1099-NEC for nonemployee compensation.

• 1099-K: These forms will be sent to you by third-party payment networks (like payment card companies, apps or online marketplaces) to document transactions for your business (typically in the form of people purchasing goods or services).

What is a W-2?

A W-2, formally referred to as a wage and tax statement, is the tax form an employer uses to report an employee’s annual income (not to be confused with a W-4, which is the form you fill out when you start a job). As a W-2 employee, you have payroll taxes automatically deducted from your paycheck to cover Social Security and Medicare, and your employer pays the government directly.

Like with a 1099, if an employer paid you more than $600 in a year, they’re required to send a W-2 (if you’re classified as a W-2 employee) by January 31 of the year following that tax year. (If they don’t send one to you by then, make sure to reach out to request one.)

How the IRS determines your employment status

When determining whether a worker is an employee or an independent contractor, the IRS looks at three criteria:

• Behavioral control: Who is controlling your work time? If you complete work on your own time and generally manage your daily schedule, it’s likely you are an independent contractor. If your employer is setting deadlines, requiring you to attend meetings and setting guidelines for how you’ll do your job, it’s likely you’re a W-2 employee.

• Financial control: Who is in control of how payment is exchanged? Are you being reimbursed for expenses? If the business aspects are controlled by you, you’re likely an independent contractor. If they’re controlled by your employer, you’re likely a W-2 employee.

• Relationship of the parties: Certain details of your relationship with your employer can also help make this distinction. If you are receiving other benefits—like health insurance or a pension—it's likely you’re a W-2 employee. (However, not all employees are entitled to receive benefits.) Often if you’ve signed a contract that dictates the terms of your work arrangement, it’s more likely you’re an independent contractor.

1099 vs. W-2 employees

When it comes to who should be classified as an employee and who should be considered an independent contractor, several factors are considered.

Independent contractors get a 1099

Some of the factors that make you an independent contractor include:

• Setting your own schedule

• Using your own personal method for finishing assignments

• Accepting tasks on a case-by-case basis—and can turn down offers of work

• Supplying your own tools

• Having more than one client

Basically, if you do your job well and finish it on time, the company usually doesn’t have much contact with you while you’re working.

Advantages of having your income reported on a 1099

Independent contractors may be able to deduct more expenses on their tax returns than W-2 employees can. Here are some expenses a 1099 employee is able to deduct:

• Home office expenses. If your business is out of your home, you’re able to deduct a portion of expenses like work supplies, rent/mortgage, cell phone and internet. You’ll first need to identify what percentage of your home is used for business (by dividing the square mileage of your workspace by the square mileage of your home), then deduct that percentage of each of your expenses.

• Business-related travel. For local driving expenses, you can either track your actual expenses for gas, insurance, car repair, etc., or you can take the standard mile deduction which takes all of these expenses into account. Travel to another city for work—including plane fare and hotel fees—is also eligible to deduct.

• Health insurance premiums and medical expenses. If you aren’t covered by a spouse or employer and you’re paying for insurance on your own, you may be able to deduct what you’re paying for health insurance up to the amount of your profit.

• Business insurance and memberships. Expenses like paying for business insurance, professional memberships, subscriptions and agent fees/commissions are also tax deductible for those that are self-employed.

Another advantage of being an independent contractor is that you have more control over your money throughout the year. Because nothing is withheld automatically, you’re able to decide what happens to your money until it’s time to pay taxes.

Employees get a W-2

You’re usually a W-2 employee if you:

• Have assigned hours or a set schedule

• Get trained by the company in a certain method

• Complete any and all work assigned to you by a manager

• Are provided the tools and materials necessary to finish your work

• Have only one employer

Advantages of being a W-2 employee

Compared to contractors, employees usually have relatively little control over their own work—but they do generally have stability and benefits that are typically only offered to employees like health insurance, paid parental leave, retirement savings plans and employee stock options. W-2 employees also don’t have to pay certain taxes that independent contractors are responsible for, such as the employer’s Social Security and Medicare tax contribution.

Contractors, however, are totally on their own when it comes to benefits, but there’s one plus for this group come tax-time: If you supply your own tools and materials, you’re able to deduct those expenses.

W-2 employee misclassified as a 1099 independent contractor

If you feel like your own job falls under the definition of a W-2 employee but you’re classified as a 1099 contractor, it’s important to speak up. For instance, if you feel like your client is exerting too much control over your workflow for you to properly be considered a contractor, they could be at risk for penalties and fines, and you may not be getting the benefits you should. The company will generally have two options: Either they’ll have to release control, increasing your freedom over your work and schedule, or they’ll have to reclassify you as an employee and start providing you with the benefits, tools and infrastructure due to employees. If you’re unable to work it out with your employer, you also can report your employer to your state department of workforce development for support.

Is it better to be 1099 or W-2?

Both independent contractors and W-2 employee jobs come with their benefits. Deciding what type of work to seek is a personal decision—one that can impact on your overall financial goals. As you’re making career decisions, it’s a good idea to consult with a tax professional or financial advisor to help you understand the implications of your decision. A Northwestern Mutual financial advisor can also help make recommendations to make sure you’ve got your financial bases covered—no matter who you’re working for.