1099 vs. W-2: What's the Difference and Why It Matters

If you're bringing someone on to work for your business, one of the first questions you need to answer is: are they an employee or an independent contractor? The answer determines how you pay them, what taxes you withhold, and what paperwork you file at the end of the year.

The Basic Difference

A W-2 employee is someone you employ directly. You control how and when they work, provide their tools or equipment, and pay them on a regular schedule. At the end of the year, you issue them a W-2 form showing their total wages and the taxes you withheld on their behalf.

A 1099 contractor (more formally, an independent contractor) is someone you hire to complete a specific project or service. They typically set their own hours, use their own tools, and work for multiple clients. At the end of the year, if you paid them $600 or more, you issue a 1099-NEC form — but you don't withhold taxes from their payments. That's their responsibility.

What's Different About How You Pay Them?

With a W-2 employee, payroll involves a lot more than just cutting a check. You're responsible for:

• Withholding federal and state income taxes from each paycheck
• Withholding the employee's share of Social Security and Medicare (FICA taxes)
• Paying the employer's share of FICA taxes on top of their wages
• Paying federal and state unemployment taxes (FUTA and SUTA)
• Providing pay stubs and maintaining payroll records

With a 1099 contractor, it's simpler on your end. You pay their invoice, keep records of what you paid, and file a 1099-NEC if the total reaches $600 in a calendar year. No tax withholding, no employer payroll taxes.

That cost difference is significant — employer payroll taxes typically add around 7.65% to the cost of each W-2 employee, before you factor in benefits.

How Do You Know Which Classification Applies?

You can't simply choose whichever classification is more convenient — the IRS and most state agencies have specific criteria for determining whether a worker is an employee or a contractor.

The key factors generally come down to three things:

Behavioral control — Does your business control how the worker does their job, not just the end result? If you dictate their schedule, train them on your methods, and direct their day-to-day work, that points toward employee status.

Financial control — Does the worker have a significant investment in their own tools or equipment? Do they work for other clients? Can they profit or lose money on the engagement? Contractors typically have more financial independence.

Type of relationship — Is there a written contract describing the work as contractor-based? Do you offer them benefits like health insurance or paid leave? An ongoing, open-ended relationship that looks a lot like employment is more likely to be treated as employment.

No single factor is automatically decisive — the IRS looks at the full picture. When in doubt, you can file Form SS-8 to ask the IRS to make an official determination.