If you’re new to consulting or thinking about jumping in, you’re probably trying to figure out the differences between W2 and 1099 tax forms, and what those differences mean to you.
For starters, let’s define the purpose of each form. The W2 is used to report wages, tips, and other types of compensation paid to an employee, as well as to report which taxes have been withheld. The 1099 is a form companies issue to report payments made in the course of business to a non-employee (IRS).
So when you’re trying to figure out which form to use, what you’re really asking is: are you an employee or are you a contractor?
What determines if you're an employee or a contractor?
This can be a point of confusion for many people, who might be under the impression that short-term or part-time employment should be classified as contract work. But being an employee isn’t about the number of hours worked or the duration of the employment, it’s about how the company engaging you controls or manages your work.
“The IRS has issued guidelines on the matter, saying, ‘If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees,’ and ‘If you can direct or control only the result of the work done—and not the means and methods of accomplishing the result—then your workers are probably independent contractors.’” (Selena Maranjian, Motley Fool)
You could be hired at a part-time job and be eligible for employee benefits. Likewise, you could work as a consultant employed by Greythorn for a three-month project and receive healthcare benefits, participate in our 401k program, etc. In both of those scenarios, you are considered an employee and need to be issued a W2 tax form.
What's involved in being a 1099 contractor?
There are a lot of good reasons for choosing to work as a contractor. The first is a big one—once you are engaged for a project, you get to direct your own work and how you get to the finish line. For self-starters, this is exciting, but as mentioned above, the IRS is very clear that this is not just a perk, it’s the law.
Contractors also get to write off many of their work-associated expenses. Depending on what you do and how you work, you could be eligible to write off part of your rent or mortgage if you work from home, the office supplies you purchase, your travel expenses, and more. Over time, these add up—so you’ll want to stay organized and keep track.
The biggest draw for most professionals considering contract work is that your paycheck almost always grows bigger than when working as an employee. But… like everything… this comes with a catch:
“Eventually independent contractors will actually owe higher taxes than employees. This is because not only will income tax be taken out, but self-employment tax as well. 1099 workers are also expected to pay twice as much for Social Security and Medicare taxes.” (Brian DeBelle, Simply Hired)
Yes, contract workers pay twice as much on some of their taxes because, when they were employees, their company paid half of the contribution to Social Security and Medicare. Contractors are responsible for both halves of their taxes now.
Contract workers are also responsible for determining if they need to establish a corporation and get a business license; additionally, they have to provide proof of insurance, pay for their own health insurance, secure office space and supplies (if needed), schedule projects around vacations, etc. And because every state and city has different regulations, the contractor must be familiar and compliant with local laws.
So what about being a W2 employee?
Most people are much more familiar with the perks of being an employee. Not only are you paying less in taxes (and can have small portions of it withheld from every paycheck, instead of having to save up and pay it every quarter or April 15), you get to enjoy employer-provided benefits. For many people, that means health and dental insurance, worker’s comp, unemployment benefits, and more.
Being classified as an employee also means that your rights are better protected by state and federal law. For example, your employer is required to pay you at least minimum wage—that’s not really true for contract work. You are also protected from multiple kinds of discrimination, and have paths of recourse should you need them. Other benefits include the right to form a union, to receive unemployment checks, etc.
Here at Greythorn...
We recruit for both contract and permanent positions, and strive to ensure our candidates understand everything that their new role will entail—from job responsibilities and perks to the tax forms you’ll be using. If you ever have questions, please be certain to ask your recruiter.
If you’re ready to start looking for a new position, check out our job board.