1099 Independent Contractor vs. W2 employee

Oct 18, 2021

1099 contractor filling out paperwork

Hiring workers is part of running a business, some may be full-time members of staff, some part-time, and others bought in for specific projects or contracts. When it comes to filling out tax forms, withholding taxes, and providing employee benefits like health insurance, it is important to understand the differences between contractors and employees.

The differences between W2 employees and 1099 independent contractors aren’t just about different IRS forms they get their names from, but also about the type of work they do and the type of relationship between employer and employee, and the labor laws that need to be adhered to.

One of the key differences between independent contractors and employees is how their taxes are paid. If a worker is an employee, then their employer will withhold taxes including local, state, and federal taxes. These include Medicare taxes, social security taxes, and income tax.

On the other hand, independent contractors are responsible for paying their own taxes and do not get taxes withheld by the businesses they work for. They are also responsible for their own retirement planning and health insurance. Independent contractors are also not subject to minimum wage laws and will not be included in benefits like health insurance.

One of the key benefits of working with ShiftPixy is that they ensure compliance, shifting risk away from businesses, and reducing the administrative burden of hiring staff. For shifters, ShiftPixy provides flexibility, makes getting paid easy, and provides access to benefits that would normally be available to employees, such as healthcare and retirement plans.

1099 Employee Meaning

Giving a 1099 employee definition is difficult due to the fact having a 1099 position means you are not actually employed. Therefore what qualifies as a 1099 employee is someone that is self-employed and works on a contract basis.

If business owners are hiring full-time employees then they should treat them as such, withhold income tax and file a W2.

1099 Job Meaning

If you are looking at 1099 position jobs, this means the work meets the 1099 tax classification. A 1099 job will generally relate to a specific project and the workers’ compensation will be agreed upon with written contracts. Independent contractors have a greater degree of control over how and when they carry out the work.

irs.gov form for 1099

What Does It Mean To Be A 1099 Employee?

If you are taking a 1099 position it is important to understand what 1099 means. So, how does a 1099 work? Firstly there are different 1099 forms to report different types of income that do not come from employment, including rental income or freelance work. The form you will receive if you are given independent contractor status is a 1099-NEC.

Independent contractors use the information on their 1099 forms to declare income on their tax returns. As payroll taxes have not been withheld, paying income tax, as well as social security and Medicare tax (combined into self-employment tax), is usually done quarterly on an estimated basis.

1099 position pay may be higher, but this is due to the fact that you are employed as an independent contractor and responsible for paying your own self-employment tax and income taxes.

Is It Better To Be An Employee Or An Independent Contractor?

There are pros and cons to being both employees and contractors.

If a worker is an employee they may be entitled to better benefits such as health insurance and sick pay and are covered by employment laws. They are also only responsible for the employee portion of social security and Medicare taxes with their employers paying the rest.

Independent contractors on the other hand must pay the higher self-employment tax to cover their medicare and social security taxes. And it is these tax differences along with the cost of providing benefits that are often a reason businesses may prefer hiring an independent contractor.

However, while independent contractors are responsible for paying employment taxes that may be higher than if they were an employee, they are also able to write off a greater number of expenses against tax and are eligible for a number of tax deductions.

There are definite advantages to being an independent contractor or freelancer, they have more control over who they work for and when. Most work for an agreed amount of time for each employer or on each project, thus giving them more freedom and flexibility in their working life.

Working with a gig platform such as ShiftPixy can offer the best of both worlds as workers have access to many of the same benefits employees do.

Is It Better to Hire Employees or Independent Contractors?

Hiring employees or contractors is a decision most business owners will have to make.

Hiring independent contractors in place of W2 employees can be beneficial for employers, as it is a way of reducing staff costs and legal responsibilities. Administrative costs are also reduced especially if you work with an agency.

While there are many reasons why workers and businesses may have a preference for either employees or contractors, it is of utmost importance to make sure you get the classification correct. As otherwise, there can be legal implications. The IRS can impose fines and W2 workers misclassified as independent contractors can claim for benefits they should have been entitled to.

ShiftPixy provides various types of 1099 employees to businesses on an on-demand basis helping companies fill employment gaps with shifters that have all the skills and qualifications required to get the job done. Using the platform makes human resource management a simple process. ShiftPixy will also ensure you stay compliant when wage and tax laws change and make sure shifts and pay are in compliance with current labor laws.