1099-NEC vs. W-2: What They Are, Differences and Tips
As an employee, your employer manages your wages and taxes in one of two ways. Most commonly, employees have a designation of either a 1099-NEC, which is a non-employee compensation tax statement, or an employee W-2 form. Learning about these classifications can help you better understand your employment status and various income tax procedures.
In this article, we explain what a W-2 employee is, describe a 1099-NEC employee, compare these two designations and offer tips for finding either a 1099-NEC or a W-2 job.
What is a 1099-NEC employee?
Companies or clients hire 1099-NEC employees, which includes contractors or freelancers, to work on a specific project, an ad hoc project or to fill a short-term need. Instead of the W-2 tax form internal employees receive, contractors and freelancers receive a 1099-NEC statement that reports only their income. The 1099-NEC information goes to the IRS, and the contractor uses the form to complete their income tax filing. Most employers pay 1099-NEC contractors a predetermined amount based on their work contract, which usually is temporary or short-term, rather than an annual salary or hourly wage.
Before hiring, contract workers submit their name or business name, address and employer identification number (EIN), which may be their Social Security number. The employer doesn’t automatically withhold state and federal taxes on the contractor's behalf, which they do with internal employees. The contractor or freelancer is responsible for submitting their estimated taxes quarterly to the IRS based on their estimated income. Doing this helps them avoid heavy fines when they file their income tax return.
Related: FAQ: When Do You Get a 1099?
What is a W-2 employee?
A W-2 employee receives a W-2 tax form stating their annual wages and how much they paid in taxes and then uses the form to file their yearly income tax return. This group comprises internal employees, and they often receive several company benefits because of their W-2 status, working as hourly or salaried employees. As internal employees, they’re subject to specific workplace rules, such as dress code and schedule.
To initiate an accurate W-2 form, professionals can submit a W-4 form to their employer, including their name, address, Social Security number and the number of dependents they plan to claim. The employer withholds state and federal taxes every paycheck on their behalf and reports the information to the IRS.
Related: Understanding Your W-2 Form: Wage and Tax Statement
Differences between 1099-NEC and W2 employees
Each employee designation has various benefits. Here are a few ways they compare to help you understand them better:
Working as a 1099-NEC contractor has many personal and financial benefits. Contractor status includes schedule flexibility, remote work options and hyper-specialization. As a 1099-NEC, you’re free to determine your work hours and tasks to complete on your schedule. As a contractor, you also can hyper-specialize in a specific area and find contracts that fit your specialization.
Benefits for W-2 employees include company benefits, such as health insurance, paid time off, overtime pay and other perks. Some employers offer benefits to entice you to join the organization, such as education funding or stock options. As a W-2 employee, a company usually hires you for an indefinite time, giving you long-term growth opportunities and job stability.
Related: Employee Benefits: Examples of the Most Common Employee Perks
Pay potential for 1099-NEC contractors may fluctuate from month to month and year to year, depending on the number of contracts they negotiate. Each contract is a separate short-term job with different negotiations for each. This gives these professionals the opportunity to charge what each job is worth, not accept a flat fee, or move on to a more lucrative project. Employers don’t withhold any taxes, so they pay estimated quarterly taxes themselves. By year-end, these professionals may have more business write-offs that have a positive impact on their tax bill.
W-2 employees receive reliable, scheduled paychecks through a salary or an hourly pay program. This dependable paycheck helps them manage income and expenses and allows for long-term budgeting. These professionals usually receive a performance review yearly and a pay raise. In some cases, it may be possible to negotiate the amount.
Related: A Complete Guide to Competitive Pay
Because 1099-NEC employees often are independent contractors, these professionals typically have more autonomy with their work processes and procedures. They often are specialized experts in their field, meaning they likely have established guidelines and practices they follow when performing their work. Employers who hire these professionals may be more willing to defer to their expertise and let them complete a project how they want.
W-2 employees typically work for companies that have set policies and employee guidelines all professionals have to follow. These often outline the step-by-step methods to perform certain tasks as part of quality assurance guidelines. Even professionals with experience in the field often change their procedures to follow a company’s preferred process.
Related: Sole Proprietor vs. Independent Contractor: The Differences and Similarities
1099-NEC employees work for themselves, meaning they’re responsible for their schedule and paying for any training courses or events they take part in. They’re often accountable for their own progress and use their personal time to improve their skills and learn about current industry practices. This also includes pursuing certifications to advance their career and improve their qualifications.
W-2 employees are more likely to receive employer-backed training during work hours. Companies may provide this for their employees to ensure they’re current with the latest processes and to ensure they follow a set procedure in their work. This can benefit both sides because the professional might be able to improve their skills to advance their career during work hours for free, while the company can assure its employees are capable and qualified to do their work effectively.
Related: The Pros and Cons of Hiring an Employee vs. a Contractor
Tips for finding a W-2 or 1099-NEC position
Use these tips to help you find the best possible position for your needs, whether it's a 1099-NEC or W-2 job:
Know your number. Have a number in mind for an hourly wage, salary or contract to help you sort through job postings and find potential positions that meet your financial needs. This also can help you negotiate for more compensation during the hiring process.
Consider taxation. In most cases, paying various taxes is more complex for 1099-NEC employees than W-2 employees. Ensure you can manage your freelancer tax requirements, or you can factor in the cost of hiring a professional tax accountant.
Determine your skill set. Knowing what your unique skills and selling points are can help you find better career fits. You can highlight these skills on your resume and during your job interview, regardless of whether the position is W-2 or 1099-NEC.
Remain open-minded. Remaining flexible as you look for employment can ensure you consider all potential options. You might start your search by looking for 1099-NEC positions before finding a great W-2 position that meets your needs, for example.
Do the math. When you receive a job offer, either W-2 or 1099-NEC, try to ensure the base pay and benefits (for W-2 employees) the employer offers meets your financial needs.
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