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Home » What are the Differences Between W-2 Employees and 1099 Workers?

What are the Differences Between W-2 Employees and 1099 Workers?

The gig economy is on the rise, more and more people are working as 1099 independent contractors, freelancers, or gig workers. But are workers and employers familiar with what it means to have this type of employment? 

There are a lot of reasons to become a 1099 worker or for a business to hire 1099 workers. What are some of the main differences between traditional W-2 and 1099 workers?

What is a W-2 Employee?

This is the most common forms of employment.  This is the classification when a business hires an employee as a full or part-time worker and, as stated by the IRS, “can control what will be done and how it will be done.”1 The company pays the employee wages and withholds payroll taxes from their compensation, including Social Security, Medicare, and unemployment taxes. At the end of the year, workers receive a W-2 tax form on which the employer reports how much was paid to the employee over the course of the year and all of the taxes that the employer withheld.

What is a 1099 Worker?

1099 workers can also be referred to as independent contractors or contract workers. They are “self-employed” in that they are not held under a company’s employment directly, but provide services to the company.  In this scenario, the company cannot control how the work or services provided will be done. For a 1099 worker, the company does not pay a salary, does not withhold taxes from compensation, and does not provide the worker with a W-2 form at the end of the year. Instead of a W-2 form, workers are issued a 1099-MISC form that shows all of the payments a company made to the worker over the course of the year. Then, the worker is responsible for paying the appropriate amount of taxes on that income.

Why is 1099 employment so appealing to companies and workers?

The growth of the 1099 workforce has been tremendous over the last few years with no signs of slowing down. Survey data shows that around 36% of the workforce was somehow involved in the gig economy as of early 2020, and “if the gig economy keeps growing at its current rate, more than 50% of the US workforce will participate in it by 2027.”2 So why do companies hire 1099 independent contractors rather than W-2 employees, and why do workers opt to be gig workers, freelancers, or self-employed workers rather than full-time salaried employees for one company? 

Benefits to Hiring 1099 Employees

Here are some reasons that companies are rapidly expanding their 1099 workforce:  

  • Companies that use contract workers don’t have to directly pay payroll taxes for each contract worker.  
  • Businesses may be able to change their workforce more easily and maintain greater flexibility with 1099 workers rather than W-2 employees. 
  • Employing independent contractors rather than full-time employees saves the company time and money on hiring, training, and fringe benefits.

Benefits to Becoming a 1099 Employee

These are some of the reasons more and more people are becoming 1099 workers: 

  • More flexibility. More freedom to choose when to work, where to work, and who to work with because of the short-term nature of contract work. 
  • Work variety. Many freelancers, gig workers, and independent contractors can select which jobs or projects they take on and which companies they work with, and can focus on the companies that pay the best and/or provide the most interesting work. 
  • Diversified sources of income. Many 1099 workers offer services to several different companies. Rather than relying on one employer they can easily engage with a wide variety of companies. 
  • Potential eligibility for federal and state tax deductions for work-related expenses.

Financial Wellness for the 1099 Workforce

indi was built to meet the unique and often underserved banking needs of independent workers and partners with marketplaces and companies that directly pay gig workers, freelancers, or independent contractors to support their 1099 workforce. Contact our team to see how the indi can help deliver the instant payments, banking features, and financial wellness tools 1099 employers and workers need to thrive.