What’s the Difference Between W- 2 Employees and 1099 Contractors

Let’s just dive right in and say: Adulting is friggin hard. 

So chances are the first time you heard about a w-2, 1099, or contract work, it may have been a little overwhelming.

I want to make sure that all of my clients and readers are INFORMED about the workforce and their careers. So, in this blog we’re going to dive into the differences between W-2 employees and 1099 contractors.

Traditional Employment and the Gig Economy

In the past, a “contractor” often referred to an individual who was skilled at a specific trade – like someone who does flooring or window installation. Now, a contractor can be your marketer, your accountant, and basically any other professional!

Why the change? The gig economy!

Traditional employment was hugely popular for decades. People could feel secure at their jobs and planned on staying within one career or company for life. They were often paid an annual salary or hourly wages with a W-2 for their taxes.

Now, the gig economy has made it so that people are working on temporary contracts or on a project-by-project basis. This has allowed people to work from home, enjoy work flexibility, and find employment from companies all over the world instead of just in their city. However, it also means that their employment status is completely different.

What is a 1099?

Most people working as a contractor or in a nontraditional job will receive a 1099. A 1099 is a tax form indicative of self-employment of contract work.

This means that they do not have their taxes withheld from each paycheck. Instead of the employer managing this automatically, contractors are paid a full amount and will have to estimate their taxes.

Instead of paying their taxes once a year, they will need to send in an estimated tax payment on a quarterly basis or potentially face a fine.

Contract work and 1099s are growing in popularity as more businesses are looking to minimize overhead and maximize efficiency. Working from home has proven to be more efficient than working in an office, so there is certainly a correlation here!

What is a W-2?

A W-2 is another tax form, but it indicates that a person is fully employed by an organization that withholds taxes for them. The majority of people in the workforce are traditionally employed and receive a W-2.

People who work and receive a W-2 are often working hours set by the company upon hire. Typically, people with W-2’s are employed by one company only, rather than multiple “gigs” that contractors can pick up.

A perk of getting a traditional position with a W-2 is that you are more likely to get benefits like PTO, health insurance, and a 401k. Taxes are also automatically deducted, allowing people to submit their taxes at the start of every year – rather than on a quarterly basis.

What are the Differences Between W-2 and 1099 Work?

There are many key differences between being a W-2 employee and a 1099 contractor.

Check out this helpful table a high-level look at some of the differences between these two types of employment:

Now that you’ve learned about some of the major differences, let’s dive into some more pros and cons for each type:

The Pros and Cons of Being 1099 (Independent Contractor or Freelancer)

• Pros:

  • Hours set with the contract in place

  • Work is assigned and accepted on a project basis,

  • Can have multiple contracts set up with no limitations on how many projects to take on

  • More control over the way you do your work

  • Minimal supervision

  • No commute!

• Cons:

  • Any new skills and knowledge are acquired with their own time and money

  • No benefits or health care

  • No PTO

  • Contractor assumes all risk of own business/company

  • Contractors must set side their tax money and pay it quarterly

  • Contractors must file their own taxes

The Pros and Cons of Being W-2 (Traditional Employee)

• Pros:

  • Benefits, like 401k

  • Tax included inside paycheck

  • Payroll tax deducted from paycheck

  • Company trains you to do the job and sets expectations that you perform in a specific manner

  • More oversight and support from a  team

• Cons:

  • Working hours set are by the company upon hire

  • Work is defined by the company that is hiring you

  • May be limited by a non-compete

  • Must spend time commuting to the office

  • More time in meetings and doing reporting

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