1099 vs. W-2 Workers: How to Hire and Engage U.S. Talent Compliantly

1099 vs. W-2: It might sound like a teeny-tiny difference, but getting these two confused can lead to serious penalties. We’re talking fines, back pay, lawsuits, government investigations, and even jail time. It’s critical to make the right determination between your 1099 contractors and W-2 employees, and avoid misclassification risk.

Hiring compliantly in the U.S. is hard — regardless of whether you’re a U.S.-based company or an international business. Federal laws can be stringent enough, and there are state-specific laws to make things even more tricky.

Fortunately, you don’t have to roll the dice to legally hire full-time employees and contract workers in the United States. At Worksuite, we’ll give you the tools and know-how to build your workforce compliantly.

Why trust us? Notably, we’ve had zero misclassification issues with our clients and 350,000+ talent since starting Worksuite in 2015. With Worksuite’s Global Engage compliance services, 1099 vs. W-2 classifications (among other things) are our bread and butter. You can count on us to give you the proper strategic guidance.

Scroll down for a helpful infographic summing up what you need to know about 1099 vs. W-2 workers.

The classification of workers as 1099 or W-2 matters, both for you and your workers. Here’s why:

A U.S. Department of Labor commissioned report found at least 30% of employers (and probably more) have misclassified workers, affecting millions of employees. Some of these misclassifications are innocent mistakes, while others are known attempts to dodge tax responsibilities and paying for employee benefits.

Either way, it’s illegal to misclassify, and it can land your company (and you) in deep water. Let’s get on the same page about what a 1099 contractor is vs. a W-2 employee — and then we can highlight the primary differences to help you hire and engage talent by the book. 

1099 workers are independent contractors who receive payments from companies through Form 1099-MISC or Form 1099-NEC. These self-employed individuals (or business entities) provide goods or services to businesses through an independent business relationship rather than full-time employment.

You might find 1099 contractors with any of the following labels:

1099 workers have greater control over how they work. They often provide their own hardware, software, and tools, and they might work with multiple clients simultaneously.

Your business doesn’t withhold taxes from contractor payments. Instead, you’ll report the total amount paid to the contractor on your 1099 form — it’s the contractor’s responsibility to report this income and pay the appropriate taxes.

W-2 employees are full-time employees who receive a Form W-2 from their employer at the end of the tax year. Your W-2 employees have a formal employment relationship with your company. As the employer, you determine their tasks, work schedules, and job responsibilities, and you also tend to provide all the hardware and software they need to do their jobs.

It’s your responsibility to withhold federal and state income taxes, Social Security taxes, and Medicare taxes from your employee’s wages. You’ll also usually provide benefits such as health insurance, retirement plans, paid time off (PTO), as well as other perks.

W-2 employees receive labor protections and benefits from federal and state laws. These include:

Classifying your workers as 1099 contractors vs. W-2 employees isn’t arbitrary. It’s based on legal criteria determined by the work arrangements, control exerted by the employer, and other factors about when and how the work gets done.

Here are a few of the primary differences to keep in mind when classifying your employees:

W-2 employees tend to only work for one business (as defined in their employment contract). 1099 contractors typically have the freedom to work for as many clients as they want. 

Businesses are responsible for withholding and paying taxes for their W-2 employees, but 1099 contractors must calculate, withhold, and pay their own taxes.

Employee payroll is typically hourly or on a fixed salary. Whereas, a client only pays a 1099 freelancer in exchange for the hours worked or tasks completed.

Payment models to 1099 contractors can come in various forms: 

Related: Want to simplify and streamline your contractor payments in up to 120 currencies? Learn more about Worksuite Global Pay. 

That said, the main difference between employee pay and contractor pay is that the employee is on a fixed salary that gets paid year-round, even while they’re sick or on vacation. The contractor only gets paid while they’re working. 

W-2 employees tend to receive employment benefits such as health insurance, retirement plans, and paid time off. 1099 contractors aren’t entitled to these benefits — they must provide (and pay for) their own.

Employers can control their W-2 employees’ work, tasks, schedules, processes, and tools. The IRS defines a full-time employee as someone who works on average at least 30 hours of service per week, or 130 hours of service per month.

1099 contractors, on the other hand, have more control over when and how they get the job done. They determine their own flexible work schedules, and typically deliver projects based on an agreed-upon scope in their contractor agreement.

W-2 employees are legally entitled to specific employment protections, but 1099 contractors are not. The nuances of these labor laws vary by state and territory. Some examples of labor laws that protect employees’ rights include: 

Related: Want to hire and engage top talent in all 50 United States and up to 190 countries, the right way? Learn more about Worksuite Global Engage strategic compliance services.

First and foremost, you need to understand the specific laws and tests that state and federal governments use to determine employment classification. Let’s start with the two most-used tests:

The Internal Revenue Service (IRS) and dozens of states use the Common Law test (also known as the 20-Factor Test) to evaluate the nature of an employment relationship. It primarily looks at three main categories:

If an employer has any of these controls over a worker, the worker should be classified as an employee.

The U.S. Department of Labor (and over 30 states) use the ABC Test to determine a worker’s employment status:

It’s important to understand these criteria, as the burden of proof now falls on the employer to prove that workers are in fact independent contractors.

Many states have built their own laws and tests. Most are built upon these same principles, but the nuances can significantly affect employment classification.

For example, California has adopted a more stringent Dynamex ABC Test. Massachusetts emphasizes whether the contractor has an independently established business. New York uses a “Right to Control Test” to look at control, supervision, and independence. Wisconsin employs a “Circuit Court Test” to look at payment methods, equipment furnishing, and the right to discharge.

Each state is different, so you’ll need to do your research and due diligence to avoid misclassification (and the penalties that come with it). That’s where a platform like Worksuite comes in handy—we make it easy to identify compliance issues and classify employees appropriately, regardless of where they’re located in the United States or worldwide. 

It’s best to work with legal and financial counsel to cover all your bases, but here’s a quick checklist to help you avoid misclassification:

Misclassification is expensive — not to mention, wrongful to employees. It can result in serious fines and penalties, as these companies experienced:

Whether you want to hire locally or internationally, Worksuite has you covered. Worksuite Global Engage helps keep you compliant by finding contractors, creating compliant contracts, and classifying workers appropriately — all backed up by a bespoke certification for engagement in the country of the contractor’s tax residency.