What is the difference between a W-2 employee and a 1099 contractor?

The classification of a worker as a W-2 employee or a 1099 contractor primarily depends on their employment relationship with the employer. Here are the key differences between the two:

W-2 Employee:

1. Employment Relationship: W-2 employees are considered regular employees of a company. They have a formal, ongoing relationship with the employer.

2. Tax Withholding: Employers are required to withhold federal and state income taxes, as well as payroll taxes (Social Security and Medicare), from the employee's paycheck. These withheld taxes are paid by the employer on the employee's behalf.

3. Benefits: W-2 employees may be eligible for various employee benefits, such as health insurance, retirement plans, paid time off, and worker's compensation.

4. Labor Laws: They are protected by labor laws and regulations, including minimum wage laws, overtime rules, and workplace safety standards.

5. Expense Reimbursement: Employers can reimburse W-2 employees for work-related expenses, and these reimbursements are typically not taxable to the employee.

6. Form W-2: At the end of the year, employers provide W-2 employees with a Form W-2, which summarizes their annual earnings and taxes withheld. This form is used to file their income tax returns.

1099 Contractor:

1. Independent Contractor Relationship: 1099 contractors are not considered employees but rather independent contractors or freelancers. They provide services to a company on a contractual basis.

2. Tax Responsibility: 1099 contractors are responsible for paying their own income taxes, including federal and state income taxes, as well as self-employment taxes (which cover Social Security and Medicare). Employers do not withhold taxes from their payments.

3. No Benefits: Independent contractors typically do not receive employee benefits from the hiring company, such as health insurance or retirement contributions.

4. Labor Laws: Independent contractors are not covered by most labor laws that apply to employees, including minimum wage and overtime laws. They are responsible for managing their own work hours and conditions.

5. Expense Responsibility: Independent contractors are generally responsible for their own business-related expenses. They can deduct these expenses when calculating their taxable income.

6. Form 1099-NEC or 1099-MISC: At the end of the year, if a company has paid a 1099 contractor $600 or more for their services, the company provides the contractor with a Form 1099-NEC or 1099-MISC, which reports their total earnings for the year.

Misclassifying a worker as a W-2 employee or a 1099 contractor can have legal and financial consequences for employers, including penalties for failing to withhold taxes or failing to provide benefits. It's important for employers to correctly determine the classification of workers based on the nature of the working relationship and to consult their accountant or tax advisor if there is uncertainty.