Is 1099 Better Than W2? What to Know for Employers & Employees

Nov 4, 2021

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Is 1099 better than W2? To answer that question you first need to understand the differences between the two. 1099 and W2 are both tax forms and your employer will fill out a different one depending on whether you are an employee or an independent contractor.

What Is A 1099 vs W2?

A W2 worker is an employee. Business owners use the w2 form to report workers’ compensation and tax deductions. When businesses hire an employee they are responsible for wages and taxes, withholding social security, Medicare, and payroll taxes from the wages paid and paying these to the government on the employee’s behalf.

A 1099 worker is an independent contractor, sometimes known as a gig worker, freelancer, or shifter. Freelancers have different employment statuses, and businesses need to fill out different forms to report their income. The 1099 form is filled out by companies and given to contractors who use the form to report their income to the IRS and calculate their tax bill.

Is 1099 Better Than W2 for Employees?

Many shifters and other gig workers ask “is it better to be a w2 or 1099 employee?”. The key difference between w2 versus 1099 is employment status and who is responsible for calculating and paying the taxes. And is it better to be 1099 or w2 may come down to how much you hate filling out forms?

However, there are a number of advantages of 1099 vs. W2 for both employees and employers that go beyond the question of “who pays more taxes w2 or 1099?” including flexibility, hiring costs, and the skill level of workers.

1099 vs W2 Which is Better for an Employee? – 1099 vs. W2 Benefits

Although historically most people have sought to be an employee receiving a regular paycheck each month the gig economy is now growing rapidly with more and more people recognizing the benefits of working for themselves over receiving a w2 salary. Freelancers have more freedom and flexibility to choose when they work meaning it’s easier to fit your job around your life, and there is more opportunity to specialize in what you are really great at and sell your services at a premium to businesses seeking those skills.

Using an app like ShiftPixy puts you in control of when you work and who you work for. You can take time off when you need it, and pick and choose the companies you want to work for.

Disadvantages of Working as a Contractor or Freelancer

As with any decision, there are pros and cons of getting paid 1099 vs. w2 and it’s important to understand the possible drawbacks as well as the benefits of 1099 income if you are wondering should I take a 1099 job?

Pay Difference W2 vs. 1099

While shifters and other independent contractors benefit from greater flexibility and have more autonomy over when they work employees benefit from greater security and a guaranteed salary. There can also be a difference between 1099 wages vs. w2 wages as there is no minimum wage for 1099 workers like there is for salaried employees.

On top of potentially lower hourly rates, 1099 workers also do not qualify for overtime pay.

1099 vs. W2 Taxes

Another key factor when asking is 1099 better than w2 are the tax differences between employees and contractors. If you are classified as an independent contractor then you are responsible for paying your own social security taxes and Medicare taxes, known as self-employment tax, as well as income tax, local and state taxes.

1099 workers must pay their own taxes and file their own tax returns. Shifters calculate their social security and Medicare taxes as well as their income taxes based upon their profits whereas w2 employees have taxes withheld from their paychecks. This means there is a bit more work required for independent contractors in terms of filling out tax forms.

However, although full-time employees don’t have to worry about calculating and paying their taxes there are tax benefits of 1099 vs. w2 including the 20% passthrough deduction.

Other Benefits You May Miss Out On Working 1099 vs. W2

One final potential drawback of being an independent contractor is that you could miss out on benefits like health insurance and sick pay. When asking “is it better to be a 1099 or w2 employee?” you need to take into account the value of these and any other benefits you receive as once you take into account social security and Medicare taxes, income taxes, and other benefits you may not be as well off as you first thought.

However, working with ShiftPixy gives access to employment perks such as medical benefits and retirement plans alongside the ease and flexibility of working in the gig economy.

Benefits of 1099 vs. W2 For Employers

And it’s not just employees who benefit from making use of the 1099 independent contractor status. Business owners also see a number of benefits to hiring an independent contractor over contracted workers. These benefits include greater seasonal flexibility, the ability to rapidly fill employment gaps, and a reduction in hiring costs, tax bills, and benefits paid.

Hiring W2 employees is a significant investment for any business. Switching to a different type of relationship can be a great way of saving money and time with lower onboarding costs, less human resource management, less paperwork, and fewer employees tax to worry about, all making a difference to struggling businesses.

Hiring independent workers, such as shifters, is more flexible, meaning you are only paying for staff when you actually need them. Workers receive money only for the hours they work, so you don’t have to employ more staff than you need during quiet times to make sure you have sufficient cover during busy periods.

Another difference between an employee and an independent contractor is that contractors are responsible for their own taxes which can dramatically cut time spent using accounting software and filling out forms.

Freelancers also have specialist skills and therefore require less staff training. And you generally don’t have to provide benefits such as health insurance or pay them if they are sick.

Cons Of Hiring Independent Contractors

One potential pitfall in hiring freelancers is making sure they actually are contractor-defined. It is important for both sides to accurately determine whether workers should be classified as employees or independent contractors as getting it wrong can lead to a hefty fine and outweigh the benefits. Luckily ShiftPixy shifts risk away from businesses ensuring legal compliance and reducing administrative tasks.

Another potential drawback of independent contractors vs. W2 employees is that employers have more control over W2 workers’ hours and giving workers a full-time contract means more staff continuity. Freelancers are better able to pick and choose when they work and it is easier for them to leave at any time.

Finally, when comparing 1099 vs. salary it is worth being aware that freelance workers may be less reliable and so it is worth working with an agency such as ShiftPixy who completes a thorough onboarding process, and have access to a huge flexible workforce meaning that if for any reason you need to fill a shift they can do so quickly and efficiently.