W-2 vs. 1099 employee

As a small business owner, “W-2 employee” and “1099 employee” are important tax classifications you should know when hiring workers. 

Understanding the difference between the two is essential to effectively manage your workforce, maintain compliance with tax laws, and make better decisions about your business’s needs. 

What is a W-2 employee?

A W-2 employee is a traditional employee who works for your company regularly and receives a regular wage or salary. As an employer, you’re responsible for withholding taxes from their paychecks, paying a portion of their Social Security and Medicare taxes, and providing them with employee benefits (if offered).

W-2 employees are typically more integrated into your company’s structure and culture than 1099 workers. They may have set schedules, use company equipment, and receive direct supervision from your management team.

As the business owner, you’d withhold a W-2 employee’s income, Social Security, and Medicare taxes from their paycheck and report these withholdings to the IRS using Form W-2. 

Examples of W-2 employees 

W-2 employees can be found in virtually every industry and occupation. Some common examples include:

• Full-time and part-time staff members
• Managers and supervisors
• Administrative assistants and receptionists
• Salespeople and customer service representatives
• Production and warehouse workers

Essentially, any worker hired as a regular employee of your company rather than an independent contractor would be classified as a W-2 employee.

What is a 1099 worker?

A 1099 worker, also known as an independent contractor, is a self-employed individual who provides services to your business on a contract basis. These workers are not considered employees of your company. Instead, they operate as separate business entities.

When you hire a 1099 worker, you’re not responsible for withholding taxes from their payments or providing them with employee benefits. The contractor is responsible for paying their taxes and securing their benefits, such as health insurance and retirement plans.

Examples of 1099 workers

1099 workers can be found in a wide range of industries and professions. Some common examples include:

• Freelance writers, designers, and developers
• Consultants and strategists
• Photographers and videographers
• Cleaners or other maintenance workers
• Delivery drivers (e.g., for food delivery or ride-sharing services)

These are just a few examples – any individual who offers services to your business without being classified as an employee could be a 1099 worker.

1099 worker vs. W-2 employee

Let’s look at the key differences between these two classifications.

• Tax withholding: As an employer, you’re responsible for withholding income taxes, Social Security taxes, and Medicare taxes from a W-2 employee’s paycheck. With 1099 workers, the responsibility for paying these taxes falls on the individual contractor.
• Employee benefits: W-2 employees are eligible for benefits offered by your company, such as health insurance, retirement plans, and paid time off. 1099 workers are not entitled to these benefits. 
• Autonomy: W-2 employees are often subject to more direct supervision from your company, while 1099 workers have more autonomy in completing their work.
• Job security: W-2 employees typically have greater job security and may be protected by employment laws — like those related to minimum wage, overtime, and wrongful termination. 1099 workers aren’t covered by many of these laws.
• Payment and expenses: W-2 employees are typically paid a regular wage or salary, and the company covers many job-related expenses. 1099 workers are usually paid a flat fee per project or hour and are responsible for their business expenses.

Are W-2 and 1099 taxed differently?

A key difference between W-2 and 1099 employees is taxes. Employers are responsible for withholding income, Social Security, and Medicare taxes from a W-2 employee’s paycheck. The employer also pays a portion of the employee’s Social Security and Medicare taxes.

1099 workers are responsible for paying their taxes. This includes income and self-employment taxes covering their Social Security and Medicare contributions. 1099 workers typically make estimated tax payments throughout the year to avoid a large tax bill when filing their annual return.

What is an advantage to working as a 1099 contractor?

One of the main advantages of working as a 1099 contractor is flexibility and autonomy. As a contractor, you have more control over your work schedule, your projects, and how you complete your work.

Another advantage is the potential for higher earnings. Because 1099 workers are not subject to tax withholding and are responsible for their expenses, they often charge higher rates than W-2 employees in similar roles. This can increase overall earnings, especially for skilled professionals in high-demand fields.

What is an advantage to working as a W-2 employee?

One of the key advantages of working as a W-2 employee is the stability and security it provides. W-2 employees typically receive steady paychecks and regular work hours. They can also access employee benefits, like health insurance and retirement plans. 

Another advantage is a more simplified tax process. Because employers handle tax withholding and pay a portion of the employee’s Social Security and Medicare taxes, W-2 employees generally have a more straightforward tax filing process than 1099 workers. This can save time and reduce the risk of errors on their tax returns.

How Swoop can help

As a business owner, navigating the complexities of employee classification and tax compliance can be challenging. That’s where Swoop Funding comes in. 

Our platform connects businesses with potential lenders and provides valuable resources to help you make better financial decisions for your company. 
Whether you’re looking to hire W-2 employees, work with 1099 contractors, or a combination of both, Swoop can help you secure the funding you need to grow your team and achieve your goals. We work with many lenders and can help you find the right financing solution for your needs.