W2 vs. 1099: Know The Difference Before Accepting Your Next Job Offer

Stop me if you’ve heard this story before. You’re on the job market and you didn’t expect it, so you start considering any and all positions that may be a good fit. Most of us are working from home now, and you just want to make a living, so you may not think it matters if you’re on staff or paid as an independent contractor.

I’m here to tell you: it does matter. Which status you work under matters. It’’s important for you to understand the difference between a W2 employee (on staff) and a 1099 worker (independent contractor). Lately I’ve heard business leaders say things as clinical as “1099s are cleaner for HR and bookkeeping,” or as high-concept as “we don’t have staff, we have an ecosystem of experts.” It makes me wonder how many small to medium business owners are avoiding expenses—and making individuals take on risk and expense—by bringing them aboard as 1099 workers instead of W2 employees.

As you conduct your job search, it’s to your advantage to understand the laws at play and what relationship you want with an employer. When you’re just trying to make a living, it’s hard to notice when a business is taking advantage of you.

This is where I note that I’m not an HR or legal professional. I have, however, worked with many of them over the last ten years to ensure I’m classifying my employees correctly. My experience is limited to the labor market in the United States.

1099 Compared to W2: Summary

The classifiers 1099 and W2 refer to the end-of-year tax forms you get for each type of employment.

Independent Contractors (i.e., self-employed) receive a 1099 from each employer who paid them $600 or more during the calendar year. This is common for a freelancer (e.g., designer, writer, web developer), a self-employed consultant, or a professional speaker. Lots of “gig work” may fall under a 1099, including: dog walker, house cleaner, or even a psychic. An independent contractor is self-employed, controls their own work hours and environment, and likely has more than one client. Their client/employer directs their work product, but not how it is produced.

Employees (i.e., salaried and hourly workers) receive a W2 from their employer that records their wages and amount of taxes paid. An employee may be full-time or part-time, be paid hourly or with an annual salary and, especially in the case of part-time work, may have more than one employer. An employee works for someone who controls their work schedule, where and how they do their work, and what they do each day. Their employer directs not only the work product, but how it should be done.

Financial Impact to 1099 Workers and W2 Employees

• Taxes: 1099 workers pay about twice as much of them. Because they’re self-employed, they pay both the employer and employee portion of Social Security and Medicare taxes. They may be required to make quarterly tax payments. Because they’re self-employed, 1099 workers can also deduct work-related expenses like travel, internet access, etc. For W2 employees, deductions for things like Social Security and Medicare are pulled from each paycheck automatically. Taxes are due (or refunded) only once a year, and work-related expenses are less likely to be deductible.
• Insurance: 1099 workers have to self-insure with either a private provider or with the help of a state or federal “connector”, while W2 employees generally receive health insurance at a lower rate through an employer. W2 employees may also have access to disability, life, vision, dental, and other insurance plans at discounted rates.
• Retirement: Some W2 employees have employer-paid retirement contributions, and most have the ability to contribute their own funds to a 401(k) or 403(b), depending on the industry in which they work. 1099 employees have to save on their own, through different investments like a SEP IRA (Independent Retirement Account), Roth IRA, or a SIMPLE IRA.
• Benefits: 1099 workers won’t get paid time off, parental leave, or any other employer-paid benefits; any time they take away from work is at their own expense. Most states also don’t consider 1099 workers eligible for unemployment benefits, though temporary changes have been made to these rules in select states due to COVID-19. Although professional development funds vary even for W2 employees, the inclusion of professional development funding in a 1099 contract is extremely rare.
• Work Expenses: For W2 employees, the essentials to do your job (e.g., a computer, software programs, email account, office) are provided by an employer. 1099 workers must furnish all of these items themselves.

Example Work Classification

Here are two examples of how the same type of work could be classified as either 1099 or W2 based on working conditions. They’re real examples based on the business I run.

Writing

Independent Contractor (1099): I ask someone to write an 800 word article about a specific topic, by an agreed-upon due date, that we will publish on our website. We both agree we’ll do one round of feedback and edits, and I will pay the writer $150. A contract is then drawn up to codify these agreements on paper, and we each sign. In completing the work, the writer will use all her own equipment and provide her own workspace. She gets paid when the work is done. She might do this for me once a year, earning $150, or 10 times a year, earning $1,500. Each contract can be executed separately, or a contract can be amended as the scope of the work increases. I could have this same arrangement with one person, or a dozen people.

Employee (W2): I need someone to plan, write and edit a variety of content for multiple channels. That person will manage deadlines and help us determine topics. They’ll be expected to follow our employee guidelines. They’ll do this work using the computer I provide to them in a place I determine (our office or approved work-from-home). There is an expectation they’ll be available during our regular business hours. The terms of their employment might be detailed in the offer letter they sign upon accepting the role, but changes to the role are infrequently updated in that document. I’ll pay them $60,000 each year, regardless of how many articles they write or other content they produce. They get a variety of employer-provided benefits.

Design

Independent Contractor (1099): I need someone to design an ebook I’ve written, and create 15 social media graphics. We agree we’ll probably have to go through three rounds of revisions. Rather than choosing to quote me a flat fee (which she could, if she wanted), a designer quotes an hourly rate and provides an estimate of how many hours each phase of the process will take. We sign an agreement to do that work, and I ask that she informs us if she’s at 90% of the estimated hours so we know if it’s going to cost more than we expected. She has to provide her own computer with Adobe-licensed software and other agreed upon tools, and must turn over all of the source files to us at the end of the project. As long as she meets her deadlines, she can work whenever she wants, including in the middle of the night. She’ll invoice us upon completion, and we’ll pay within 30 days. (She could also choose to invoice 50 percent of the balance upfront and the remainder upon completion, which would be smart to regulate her cashflow and ensure we're actually paying clients before she starts working.) 

If it worked well, this agreement could continue. Perhaps we need 15 social media graphics designed every month; we would then request estimates for each new piece we want her to design. As long as she’s controlling her hours and how/when she gets her work done, she could remain as a 1099 employee paid an hourly rate. 

Employee (W2): Rather than just transactional design, I decide we need a designer to work with us to design a variety of material for print, web, and trade shows and help us evolve our brand. This person will manage multiple projects at one time (prioritizing whatever the business says we need), and work on a company-issued computer in our office (or in an approved home office) with software we provide. We’ll pay her $60,000 per year, with scheduled pay days and employer-provided benefits.

Determining If A Position Should Be W2 or 1099

Business needs often determine if a given role should be classified as a 1099 worker or W2 employee. It all comes down to how much control you want to have over the work someone does and how they do it. Sometimes you can have both (my business has both staff and freelance writers). Sometimes it makes sense to switch a position from one classification to another—we started with a freelance designer and later hired one as an employee as our business needs increased. The IRS has guidelines to determine if an individual should be an independent contractor or an employee. Not following these guidelines opens a business up to legal risk. What I’m exploring in this section are the functional differences between the two from a business and leadership perspective.

A role should never change from one designation to another without an accompanying change in benefits and work arrangements. It’s not just something you do for accounting; appropriately designating a worker as an independent contractor or an employee is both a legal and strategic decision.

1099 Independent Contractor Considerations

1099 workers generally have established expertise or skills in an area. They get hired for that expertise or those skills on a limited basis, to complete a defined work product. This means the employer shouldn’t expect them to require training to do the work they’ve been hired to do, nor should they provide it.

A 1099 worker is generally a shorter term commitment than a W2 employee. I’ve used the term “worker” throughout this article intentionally; 1099 workers are hired to do a well-defined job. What matters is the work product they complete—and that’s it. It’s much easier to terminate a 1099 worker because you can simply say you don’t want to pay them for the work anymore. Other than what is in their contract (if they were smart enough to have a client sign one), businesses have no obligation to a 1099 worker. There’s no such thing as “laying them off”; the working relationship (and governing contract) just ends.

Because they’re an independent contractor, it may be harder to develop a working relationship with a 1099 worker. That’s not to say that it can’t be done; many businesses (particularly, in my professional network, agencies) use this model. If someone has specialized expertise but a business doesn’t have a need to keep them on full-time, having them as an independent contractor may be the next best solution, and allow an agency to occasionally offer specialized services to clients. Independent contractors are by nature independent, though. An employer can’t preclude them from doing other work, even for a competitor, whereas restrictions on outside or supplemental employment may be included in a W2 employee’s contract.

W2 Employee Considerations

A W2 employee is a commitment of time and resources. Unlike a 1099 worker, W2 employees cost a business much more than their annual salary because the employer pays a share of taxes, benefits, and equipment. The expense of a W2 employee can vary based on the state where the business is located and where the employee lives (this can be a hidden cost of remote work for some businesses).

Businesses have a longer-term commitment to W2 employees, and decisions to increase or decrease the workforce have a longer-term impact. This is good for employees, because it establishes trust and a sense of investment. Retention of W2 employees is important, and high employee turnover increases business costs in the long-run. It’s in the employer’s best interest to develop good working relationships with each employee. Beyond retention, W2 employees should (in my opinion) have a long-term benefit to the company. In addition to completing the work they were hired to do, they can continue to grow their skills and contribute at a higher level over time. Whether this means completing more complex work or moving into supervisory or management roles, W2 employees can rightfully expect some opportunity for growth—and employers should expect and acknowledge growth in skills over time.

In the designer example above, we could certainly have spent less on a freelance designer, or even multiple freelancers. We were happy with the work we were receiving. But when it became clear that our visual brand was core to our business and we wanted more control and consistency over it, we hired a full-time employee. I can reasonably expect more from a designer in this role than I could from a freelancer, and successfully retaining a designer will reduce employee turnover costs and provide long-term value to our business as our brand—driven by her expertise— continues to develop.

Work/life balance is often a greater concern for businesses with W2 employees because they stand to control the circumstances of work. While some employees are expected to follow a strict schedule, others are afforded flexible schedules. The employer has the power in this relationship, and they should recognize that there are many ways to control the production of work product at an acceptable level other than mandating butt-in-seat hours.

Advice For Job Seekers

The biggest piece of advice I can offer:

Know the law, and your rights, as an employee.

Confirm in an interview, or perhaps even in pre-application communication, if a posted position is for a W2 employee or a 1099 independent contractor. If a business advertises that they want you to “join their team,” but pay you for full-time work as a 1099 worker, proceed with caution. While full-time 1099 work is possible, it’s not the norm. Because an independent contractor controls their work environment and how they do their work, rather than the employer, it’s tough to argue that one would be truly joining a team—especially if the rest of the team is W2 employees.

An additional piece of advice worth mentioning:

Think long and hard about the type of work you’d like to do, and the relationship you’d like to have with an employer.

Working as an independent contractor should be your choice, not your employer’s. Although many stumble into it unintentionally (how many How I Built This interviews' start with, “I got laid off and figured it was time to try going out on my own?”), it’s a fulfilling approach to work for many people. And for many others, it’s something they do in addition to full-time work as a W2 employee.

I’ve seen some very good job opportunities recently that would be 1099 positions. Some are short-term 1099 commitments with the potential for full-time W2 employment. For example, I saw a posting clearly advertised as a contract position to write and implement a marketing strategy within three months. The posting later indicated that if economic conditions and business growth are good, after the marketing strategy is launched they may have a full-time marketing opening. I think this is a sign of a business that is transparent and willing to give a little (high hourly wage to an independent contractor) during an uncertain time, and potentially change the working relationship to something more sustainable to both parties if the economic conditions are positive.

Other good 1099 positions offer the chance to contribute a specific expertise (e.g., marketing, PR, design, web development) to a small business or solo entrepreneur in a very limited capacity, perhaps just a few hours a week. These can be good resume builders working for a business that cannot afford to have employees, yet. Don’t write something off as a bad opportunity just because it’s a contract job—and who knows? You may grow to love working under such flexible and focused conditions.

However, if what an employer is advertising sounds like a job where they would control what you do, how you do it, and/or the work you would perform is a key function of the business, it should be a W2 employee. Don’t let yourself be taken advantage of in this area. If you have an excellent job offer with the surprising detail of a 1099 arrangement, consider consulting with an employment attorney—it could be money well-spent to avoid future financial surprises.

I’d like to thank my friend (and independent contractor by choice) Amma Marfo for editing this article and sprinkling in her expertise. If you need a writer, speaker, facilitator, career coach, or a fascinating person to interview on your podcast, consider Amma.