It can be overwhelming, and slightly confusing, to decide whether you want to be considered a salaried employee or a contractor in the eyes of the company or client you want to work for. If you are part of a business, the decision on how to designate someone on payroll is equally so. This all depends on whether a 1099 vs. W2 form is coming into play.
While the prospect of gig work is growing within the United States, it may affect you when you have to turn in your return during tax season.
So what are the pros and cons of a 1099 tax form vs. W2 for the employer and employee? Read on to find out.
What is a 1099 Form vs. W2?
First, let’s go over the 1099 form. A 1099 form is usually given to those who are independent employees, freelancers, or contractors. An employer will give this to you if your role is temporary or for the lifetime of a project with a specific client. There are other types of 1099 forms also, such as the 1099-NEC, 1099-DIV for dividends, and 1099-INT for interest.
A W2, on the other hand, is often given out by businesses to traditional salaried employees that have a permanent role within the company. You receive this as long as the employer paid you at least $600. It will report the income you received the previous year, as well as how much tax your employer withheld.
You can use both forms if you receive income from side hustles. But knowing the difference will matter when it comes to what your position is within a business or corporation.
W2 vs. 1099 Form For Employers
If you’re not as willing to pay taxes, you may be likely to go with a 1099 form. This also makes it easier on the times when you actually need that employee so you can change contracts based on your needs. Giving an employee a 1099 form will give you a lot of freedom in the financial sense.
A W2 would be less helpful for employers since you need to calculate how much tax to withhold and pay through your pocket, pay for employee benefits like a 401(k), bonuses, and health/life insurance. You would also be inconvenienced with not having the room to change the period of employment as they are considered regular employees.
W2 vs. 1099 Form for Employees
As an employee, you have a certain degree of flexibility in how you want to work, but you do have factors to consider when looking at a W2 vs 1099 form. You need to consider:
How much tax to pay
Permanent employers usually pay half of your Social Security and Medicare taxes. If you’re self-employed, you’ll need to pay twice as much — meaning 15.3% of your hard-earned money will go toward that. Contractors will also have to deal with making quarterly estimated tax payments throughout the year.
When you’re part of a company, you are usually given access to Self-employed contractors do not have that luxury, though there is the option to get health insurance premiums deducted.
Work-related expenses such as postage, travel, Internet access, and home-office maintenance can be deducted on your tax return, which is good news for freelancers. The same can’t be said for regular employees since office materials are provided for you.
If you want flexibility and be able to write off expenses on your return, consider a 1099. Yet, if you want your employer to take care of the factors above and feel a sense of security you’ll be at a job long-term, then you should go with a W2 form.
Know Whether a 1099 vs. W2 Form Works For You
It can be difficult for employers and employees to see whether a 1099 vs. W2 form is a good route to take for tax purposes. Whichever form you go with, make sure that it works for your long-term goals in your career.
We hope you enjoyed learning more about this topic. If you want to learn more about all things related to business, check out our Business section for more interesting articles like this.