What’s the Difference between a 1099 Worker and a W-2 Worker?

1099 vs W-2 Pathway HR Solutions

The main, high-level difference between a 1099 worker (independent contractor) and a W-2 worker is that is an independent contractor is self-employed, and a W-2 worker is an employee of an organization.

Independent Contractors (1099 Workers)

Because they are self-employed, independent contractors are not bound to a company’s policies about how they do the work for which they are contracted. They must also provide their own tools, pay their own employment taxes, and submit invoices to get paid for the services that they provide.  Finally, they have the freedom to provide their services to as many clients as they would like.

Employees

Workers who are classified as employees are subject to having the how and what of their work controlled by an employer.  In return for this control, employers are responsible for paying employees, withholding employment taxes, and providing the tools and gear that are needed to carry out workplace duties.  In addition, they may also offer benefits such as dental, disability, medical, and vision insurance, as well as a retirement plan and mileage reimbursement for business-related travel.

Examples:

Contractor

A hairdresser who pays for their own equipment and materials, building or booth rent, and business insurance is an independent contractor.  They are responsible for paying their own employment taxes.

Employee

A hairdresser whose appliances, shampoos, conditioners, other materials, building rent, and business insurance are paid for by the salon owner is an employee.  In this relationship, employment taxes are withheld during the processing of payroll.

Classification

Improper classification of workers can result in steep fines and penalties from the Department of Labor and the Internal Revenue Service (IRS). If you’re unsure about how to classify your workers, seek the assistance of a reputable professional.  Alternatively, you may complete Form SS-8, which is used to determine the worker status of the purpose of tax withholding responsibilities, and submit it to the IRS.

This chart provided by the Department of Labor is a quick guide to help you determine if your workforce is properly classified.

Myths about Misclassification

The Department of Labor has an excellent resource that dispels what they refer to as “pervasive” myths about misclassification.  Here is one example:

Myth: “I telework or work offsite, so I am an independent contractor.”

Truth: “You are not an independent contractor simply because you work off-site or from home.”

For other examples of misclassification myths, visit https://www.dol.gov/agencies/whd/flsa/misclassification/myths.