1099 vs W2: Difference Between W2 Employees & 1099 Contractors

Practical and real-world advice on how to run your business — from managing employees to keeping the books. RunPractical and real-world advice on how to run your business — from managing employees to keeping the books. Profit & loss opportunities –The chance of incurring a loss due to significant investments in equipment and other resources suggests that the worker is a contractor. This will help in documenting the wage expenses that the firm posts on tax returns.

As an independent contractor, you set the terms of how you’re paid. Payment methods can range from cash and cheque to direct deposit or bank transfers. Read our guide on payment methods for independent contractors for more information. A worker’s role determines which 1099 vs w2 information return an entity would provide. Entities provide a Form 1099-Misc to independent contractors and Form W-2 to employees. However, there may be instances where a worker may be serving as an independent contractor and an employee for the same entity.

Examples of 1099 vs. W-2 Workers

There are no payroll taxes or benefits that must be provided to a contract worker. This can save your business money as opposed to having employees on staff. Independent contractors are also known as “1099 employees,” which comes from the tax form you file with the IRS at the end of the year. Many small businesses consider hiring 1099 contractors over W-2 employees to cut back on costs and avoid legal responsibilities. The information related to the first paycheck till the final one of the year comes from W-2 forms. From a worker’s perspective, the change in business hiring preferences has led to many more workers falling under the independent contractor classification as opposed to full-time employees. To illustrate this trend, independent contractor expenses as a percentage of total expenses for smaller businesses has increased in the past decade (8.1% in 2014 vs. 5.8% in 2007).

But since you hire contractors for specific services that you’ve agreed upon, you don’t have the luxury of being able to task them other duties without changing the scope of your agreement. They also generally set their own hours and deadlines for completing the work. This could lead to a little less reliability, especially if they have other clients they’re working for that may impact their schedules and delivery dates. Form 1096 reports all 1099 forms issues to independent contractors and the total amount of payments made. You’ll generally pay an independent contractor per project, and they’ll usually incur the cost of business-related expenses.

Pros and Cons of Hiring Employees and Independent Contractors

For employees, the information provided on a W-2 is necessary to file an income tax return each year. In addition, employees can utilize this form to determine how much they owe the IRS or receive via a tax refund. Independent Contractors can choose their work and how they are paid.

You have more control over employees for items such as work hours and responsibilities. Taxes from their wages must be withheld, and your business may also provide benefits such as health insurance and paid time off. Employees may undergo specific training once they have been hired.