1099 vs. W-2: Key differences employers should know

Learn the differences between 1099 versus W-2 employees

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The trend of remote work and global hiring is reshaping the modern workplace as businesses increasingly tap into a worldwide talent pool. While this shift broadens access to diverse skills and perspectives, it also affects how companies manage and classify their workforce. 

For businesses in the United States, this includes understanding how 1099 versus W-2 workers differ and how hiring one over the other can affect the entire organization. Knowing how to classify workers is also key to complying with Internal Revenue Service (IRS) regulations to avoid costly penalties. 

In this guide, we’ll explore the benefits of 1099 workers versus W-2 employees, their respective differences, and their potential impact on employers and workers. We’ll also explain how 1099 taxes versus W-2 taxes differ to ensure compliance.

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W-2 and 1099 workers: Understanding the differences

The designations "W-2 employee" and "1099 worker" refer to the IRS tax forms used for each: Form W-2 for full- or part-time employees and Form 1099 for contingent workers, such as independent contractors, freelancers, and consultants.

A W-2 employee typically embodies the traditional role of a staff member. They regularly perform tasks that are central to a company's operations, and the employer actively manages their work schedule and duties and directly withholds taxes from their wages. W-2 employees usually enjoy a range of benefits, including overtime pay, paid time off, minimum wage assurances, disability insurance, health insurance, and retirement plans.

Examples of W-2 employees include:

  • Office administrators who typically work in an office setting, managing schedules, organizing files, and handling communications under the direction of company management
  • Retail store managers who oversee the daily operations of a retail store, including managing staff, organizing inventory, and ensuring customer satisfaction while adhering to corporate policies
  • Software developers who create, test, and maintain software applications per the employer's specifications and requirements
  • Healthcare professionals who work scheduled shifts, provide patient care, and perform duties according to hospital guidelines under the supervision of hospital administration 

In contrast, 1099 workers, also known as contingent workers, independent contractors, freelancers, or consultants, operate with more autonomy. These self-employed individuals set their own hours and work locations, but they’re responsible for their own tax obligations and generally do not receive the benefits that W-2 employees do. They must also supply their own tools and equipment, handling maintenance and replacements themselves, and usually have fewer labor protections.

Examples of 1099 workers include:

  • Rideshare or meal delivery drivers who use their own vehicles to provide transportation or deliver food and earn based on the number of rides or deliveries completed, often with the possibility of earning tips
  • Independent contractors in trades like plumbing or electrical work who often operate their own businesses or work through various vendors and use their own tools and equipment to provide essential services to residential, commercial, or industrial clients
  • Freelancers in creative fields such as writing, graphic design, and web development who offer their skills on a project-by-project basis to multiple clients simultaneously, often working irregular hours to meet project deadlines and client time zones
  • Consultants, such as brand specialists, who provide expert advice and strategic solutions to businesses wanting to develop or refresh their brand identity and may collaborate with the client’s in-house teams or manage the entire project independently

Knowing how to classify your potential hire

Before hiring someone as a 1099 contractor or a W-2 employee, you should assess factors such as the volume of work and how critical it is to your operations. You'll also want to consider budget constraints, the potential legal consequences for misclassifying an employee, and company culture overall.

Workload

If the role is central to your business, such as a software developer for ongoing product development, a W-2 employee may be more suitable because of their consistency and reliability. But if the job is more specialized and occasional, such as a cybersecurity auditor for periodic system checks, a 1099 contractor might be more practical, given the flexibility and availability of their specialized skills.

Cost

Be realistic about what you can afford. While 1099 contractors may initially seem cost-effective since you aren't responsible for their benefits, they often command higher hourly rates to offset their tax and insurance costs. Also, think about the potential risks associated with higher turnover rates among contractors, which could lead to increased recruitment and training costs for new hires.

Legal implications

Misclassifying a W-2 employee as an independent contractor can lead to significant penalties, including back taxes and unpaid benefits liabilities for up to three years. It's essential to correctly identify independent contractors and employees according to the Fair Labor Standards Act (FLSA) and local or state laws. Ensuring compliance with these regulations helps avoid severe legal consequences.

Team morale

Being employed by a company often fosters a sense of loyalty through team-building activities, regular interactions with coworkers, benefits like retirement plans, and a supportive work environment. In contrast, contractors might not develop the same depth of loyalty due to less integration into the company culture, making them more prone to accepting better opportunities elsewhere. 

Can a worker get a 1099 and a W-2?

In short, yes, many people can and do receive both documents. For example, if someone has a full- or part-time job, they would get a W-2 from their employer. They may also pick up freelance or consulting work on a contract basis, for which they would get a 1099—two different forms for two different companies.

There are also scenarios, although less common, where an individual might receive both forms from the same employer. For example, a salaried executive might also receive part-time fees for serving on the company's board of directors, leading to both W-2 and 1099 forms from the same organization.

Also, a company that’s satisfied with a contractor’s performance may offer them a full-time position. If the contractor agrees, they might receive a W-2 moving forward, in addition to their previous 1099, marking their transition from contractor to employee status, albeit for different periods and not overlapping duties.

Hire compliantly, efficiently, and globally with Oyster

Understanding the differences between 1099 workers and W-2 employees may seem complicated, but it’s vital to managing your team smoothly and effectively. And with Oyster, it’s a seamless experience. The comprehensive platform automates every step of the process, from hiring and onboarding to payroll and ensuring compliance in more than 180 countries, all without needing to set up local entities. While Oyster handles the complexities of hiring globally, you can focus on what matters most: growing your business.

Discover how Oyster can help you to compliantly hire global contractors as well as full-time employees to scale your organization beyond borders.

About Oyster

Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.

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