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

By Indeed Editorial Team

Updated March 8, 2021 | Published January 22, 2021

Updated March 8, 2021

Published January 22, 2021

As an employee, your employer can designate the work you do in a couple of different ways. Most commonly, employers make employee designations by using various tax forms—most commonly, a W-2 form or a 1099 form. Not only do these forms impact the way you pay your taxes, but they also inform how you perform your daily tasks. In this article, we explain what a W-2 employee is, describe a 1099 employee, provide the pros and cons for both designations and offer tips for finding both W-2 and 1099 jobs.

Related: What Is a Contract Employee?

What is a W-2 employee?

A W-2 employee is a person who receives a W-2 tax form from their employer at the end of each year. These people are considered internal employees and receive several benefits from their W-2 status. Employers can offer an hourly wage or an annual salary to W-2 employees. With each paycheck, the company withholds certain state and federal taxes on behalf of the employee. Since these employees work as internal employees for their business, they're often subject to certain workplace rules and expectations, like dress code and work schedule.

Related: 5 Common Examples of Taxable Earned Income

What is a 1099 employee?

A 1099 employee is often called an independent contractor or freelancer. Companies or clients hire these employees to work on a specific project or to fill a short-term need the majority of the time. Rather than the W-2 tax form internal employees receive, contractors complete a 1099 tax form instead. Most employers pay their 1099 employees a pre-determined amount based on the stipulations of the work contract, which is almost always temporary, rather than an annual salary or hourly wage.

The contract worker's company or client does not automatically withhold certain state and federal taxes on the contractor's behalf as they do with internal employees. However, 1099 employees often benefit from more freedom in how and when they perform their duties than internal employees.

Related: Sole Proprietor vs. Independent Contractor: The Differences and Similarities

Benefits and disadvantages of W-2 status

Working under W-2 status provides several benefits and a few disadvantages. When applying for W-2 positions, it's important to know what to expect in terms of taxation and work requirements to ensure the role is the right position for you:

Benefits

Review the primary benefits of working as a W-2 internal employee:

  • Single employer: As a W-2 employee, you'll likely only have one employer. Of course, people can work more than one W-2 position, particularly if both are part-time, but generally, W-2 employees only have to manage one tax form come tax time.

  • Long-term potential: Most employers hire their W-2 employees indefinitely rather than on a short-term contract. W-2 employment usually provides job stability and long-term growth opportunities with the company.

  • Employer benefits: Employers are required to provide certain benefits to their W-2 employees based on various company characteristics. Others offer benefits to entice employees to join the organization. You can expect benefits like health insurance, paid time off, overtime pay and other perks.

  • Dependable pay: Most W-2 employees receive regular, dependable paychecks, either through a salary or an hourly pay scheme. This helps manage income and expenses.

  • Tax withholding: Employers withhold certain amounts from their W-2 employees' paychecks at both the state and federal level to pay taxes, easing the tax burden on their employees.

Disadvantages

While there are some great benefits to working as a W-2 employee, you should consider the potential downsides before accepting a position:

  • Lack of autonomy: As a W-2 employee, your employer can determine the specific way in which you perform your job, even if you prefer to manage your tasks differently.

  • Employer-set schedule: Usually, you'll work specific hours set by your employer with little freedom to choose when you work.

  • Rules and guidelines: You'll have to abide by certain company rules and regulations like dress code, appearance and code of conduct.

  • Limited negotiation: Almost all W-2 employees can and do negotiate pay raises in the course of their career, but you may have fewer opportunities to do so than you would as a contract worker who negotiates every job they work on.

  • Set workplace: Most employers assign certain workspaces for their employees, requiring them to work out of a specific office or another workspace.

Related: 4 Tips on Applying to an Internal Job Posting

Benefits and disadvantages of 1099 status

Working as a 1099 contractor has a number of personal and financial benefits, but these positions are not without their disadvantages. Consider both before accepting any 1099 positions:

Benefits

1099 employees often enjoy more freedom than W-2 employees. Consider these primary benefits of 1099 work:

  • Hyper specialization: As a 1099 employee, or freelancer, you can hyper specialize in a certain area and find jobs that cater to your expertise.

  • Schedule flexibility: Employers do not always have the same day-to-day control over contract workers as they do with W-2 employees, meaning you can often choose what hours and days you'll work as part of your contract.

  • Remote work options: Just like the hours you work, you'll also likely have control over where you work. Many 1099 employees work remotely rather than coming into an office or other specific employer-specified workspace.

  • Pay potential: Often, 1099 employees have more control over their earnings since you can stipulate how much you want to earn on each individual contract you negotiate.

  • Short-term commitments: Most of the time, your contracts are short-term as a 1099 employee, meaning if you don't connect well with the company or client, you're not reliant on them for a steady paycheck and can find other work elsewhere.

Disadvantages

Working as a 1099 employee is not without its disadvantages. Consider these drawbacks before committing to a 1099 position:

  • Complicated taxation: As a 1099 employee, you'll be responsible for managing all of your state and federal business taxation. Your clients will not withhold any income from your paychecks. Additionally, you'll likely have quite a few different 1099 forms to assess and submit at tax time, which can be complex and take time.

  • Lack of benefits: You won't be eligible for any employer-sponsored benefits through your employer, like health insurance, paid time off or overtime pay.

  • No assured long-term stability: 1099 work does not offer much long-term stability since nearly every job is a short-term commitment.

  • Inconsistent pay: Your pay will fluctuate from month to month and year to year depending on the number of contracts you have and the amount of money you make on each contract.

  • Repetitive training: Your clients might require you to train on programs or practices you're familiar with, taking time away from your actual work duties.

Tips for finding a W-2 or 1099 position

Use these tips to help you find the best possible position for your needs, whether it's a 1099 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.

  • Consider taxation. In most cases, completing tax payments is more complicated for 1099 employees than W-2 employees. Ensure you're up to the task of handling your freelancer tax requirements or factor in the cost of hiring a professional tax accountant to assist you.

  • Think about your skill set. Know what your unique skills and selling points are. Highlight those on your resume and during your job interview, whether the position is W-2 or 1099.

  • Remain open-minded. You might desire a 1099 position but find a great W-2 position that meets your needs during your job search. Remain flexible as you look for a position to ensure you consider all potential options.

  • Do the math. When you receive a job offer, either W-2 or 1099, ensure the base pay and benefits (for W-2 employees) offered by the employer will meet your financial needs.

  • Ask for what you need. Negotiate for the contract you want. Think about the money you could potentially make if the position were internal or freelance and ensure you're appropriately compensated.

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