My dad, a CPA, always told me, “There’s only two things in life that are certain: death, and taxes.” He may have copied that from someone else, but the sentiment holds true today.
Taxes are a pain.
Whether you’re a freelancer or employer, trying to figure out tax forms isn’t always obvious. And if you’re a creative type of person trying to make it in a business world, it can feel tedious and even stressful. Who wants to think about a 1099 vs W2 when there are articles to be written and logos to be designed?
Like it or not, tax forms are a big part of running a business, no matter how small it is. I have often talked with freelancers who are struggling to navigate taxes as a self-employed individual. They aren’t sure what all of the numbers and acronyms mean, and how to make the best decisions for their business.
I have been fortunate to have my aforementioned father by my side, explaining technicalities along the way and advising me on how to move forward. Not everyone is so lucky, so hopefully sharing a bit of that knowledge here will help some of you out.
I can’t cover everything in a single piece, so let’s start at the beginning. This article will cover the basics between a 1099 vs W2, and which might apply to you.
What is the difference between a 1099 vs W2?
Let’s just start with some definitions so we’re all on the same page.
A 1099 form is the official report of any income other than a salary. Any client that pays you more than $600 in a given year should send you a 1099 form by January 31st of the next year.
Contractors receive a 1099 for income they have earned, but you might also see a 1099 if you have an investment portfolio, receive unemployment, if you withdraw money from a retirement account, or various other reasons.
If you have received any type of 1099 form, you must report that income to the IRS.
A W2 comes from a traditional employer. A W2 details not only your income, but the amount of money that was withheld by your employer. This includes federal and state income tax, social security, medicare and some benefits.
Quick tip: To track your 1099 expenses and keep peace of mind at tax time, try Bonsai – built solely for self-employed workers to track expenses, maximize tax write-offs, and and avoid surprise bills at tax time.
So what does a 1099 vs W2 form actually mean to you? Freelancers should never receive a W2 for independent contract work. A W2 employee is someone who is paid through an employer’s payroll system and has those taxes withheld. If you think you have received any type of tax form by mistake, you should contact the organization who sent it immediately.
Pros and Cons of a 1099 vs W2
There are a variety of reasons it makes sense to do business with 1099s vs W2s. Let’s break down some of the pros and cons so you know what you’re getting into.
Pros of a 1099 For Employees
- As a 1099 employee, you aren’t locked into a long-term contract. You also often have greater flexibility in where and when you get the work done.
- You set your own rates––there’s no limit to how much income you can make in a year.
- It’s a great option for those who don’t need or want to work full-time. You take on whatever work you want and leave the rest on the table.
Cons of a 1099 for Employees
- As a contractor, you can expect to pay more in taxes, since you don’t have an employer taking on some of that burden.
- Similarly, you are responsible for paying taxes throughout the year. Since they aren’t withheld from your paycheck, make sure you’re meeting the quarterly deadlines.
- You are responsible for bringing in all business for yourself. If you are relying on 1099 income and nothing else, this can put you in a stressful situation.
Pros of a 1099 For Employers
- For employers, it is undoubtedly cheaper to pay for a 1099 vs W2 employee. Even paying higher rates to a contractor, you more than make up for it by paying less in taxes and avoiding the costly benefits usually due to an employee.
- Typically, companies don’t provide equipment for contractors. You don’t need desk space, computers or a printer for a 1099 worker. You also don’t have to pay to train them. Some businesses can operate entirely without a physical office space by using 1099 workers.
- Just as 1099 workers aren’t tied into a long-term relationship with an organization, the employer has more flexibility when bringing on 1099 vs W2 workers. If you need someone with a very specific skill set to get a project off the ground, you can bring someone on as a contractor for a few months without having to onboard a new full-time employee.
Cons of a 1099 For Employers
- The flexibility that a 1099 offers can turn into a major downside for employers. Contractors can leave at almost any moment––most contracts are at-will or short term. That means that if you wind up needing talent for longer than you initially thought, you might be out of luck.
- Workers in a 1099 vs W2 arrangement tend to work for multiple clients at once. They may be less focused on your projects than a full-time employee would be, because they aren’t necessarily invested in the long-term outcomes of your organization.
- Most contractors don’t work at your office. While this saves you money, it also means you have less oversight than you might over a traditional employee. If you hire great contractors, this is less of an issue, but you don’t always know what you’re getting into.
Pros of a W2 For Employees
- As a W2 employee, your employer is obligated to pay half of your Medicare and Social Security taxes. This translates to significant savings to you over a year.
- As a W2 employee, you are entitled to unemployment benefits if you should be laid off for any reason. This is a huge safety net unavailable to 1099 workers.
- Full-time employees generally receive non-monetary benefits such as health and dental insurance, retirement funds, disability benefits and paid leave.
Cons of a W2 For Employees
- W2 employees are paid a set salary and expected to fulfill a set of duties. Sometimes this means you’ll work late or on weekends to get things done, without being paid overtime rates.
- Working full-time for the same company can get boring over time. You’re likely to work on the same types of projects over and over again, and you don’t have a lot of say in what you take on.
- In general, W2 employees have less control over their lives. You don’t set your hours, you’re often tied to a certain location and you need permission to take time off.
Pros of a W2 For Employers
- W2 employees are a safe bet. You can have a thorough hiring process, and as long as you have a strong company culture, you can depend on loyal employees.
- Full-time employees tend to stay with a company for an average of 4 and a half years. There is a strong benefit in long-term workers. They can take on varied projects without being trained for each task, and eventually advance within the company, building a solid workforce.
- Investing in full-time employees is an investment in your business. Every new skill they learn is a skill being applied back into your organization. 1099 vs W2 employees might be honing their skills on your dime, then turning around and raising their rates.
Cons of a W2 For Employers
- Employees can get burned out if they are working too hard. While contractors may not be as loyal to your brand, they bring fresh ideas to a project.
- W2 employees are pricey. The cost of onboarding, equipment, training, benefits and payroll adds up.
- During slow times for your business, you must still pay full-time employees. Laying off workers is a much more expensive and devastating process than simply not renewing contracts for freelancers.
How to decide between a 1099 vs W2
What’s best for your business? There are situations when 1099 vs W2 workers make sense, and vice versa. There is no one-size-fits-all solution.
When employers look at which type of worker to hire, they should evaluate their end goal. What is the time frame, long or short-term? Do you need a highly specialized worker, or someone with a broad skill set who can juggle multiple projects at once? What is your budget? Could the project turn into something bigger?
Individuals should think about their lifestyle and income needs. Do you have family members relying on a steady income? Do you travel often and need a flexible schedule? Also think about your personality. Can you handle the structure of a 1099 vs W2 worker? Are you self-motivated or do you need more supervision?
Different industries also have different expectations. You are far more likely to find 1099 vs W2 positions in industries like web design, writing, PR, and art than you are something like engineering or academics.
In short, the difference between a 1099 vs W2 form is the type of work you’ll be doing with an employer. If someone hands you a 1099, you’re a contractor and need to plan on paying your own taxes. If you’re filling out a W2 before you start work, you’re taking on a more typical, 40-hour-work-week position.
There are advantages and disadvantages to both, so at the end of the day, you just have to do what’s best for you.
Because another thing that is certain, beyond death and taxes, is that only you can know what kind of career you want to make for yourself.
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